Madoff's Accountant Charged With Fraud

Bernie Madoff's accountant David Friehling surrendered today to face charges of securities fraud and other offenses in a criminal complaint (pdf). Friehling served as Madoff's auditor.

In a statement, the SEC said Friehling "merely pretended to conduct minimal audit procedures of certain accounts to make it seem like he was conducting an audit."

Accurate financial statements would have shown that Madoff's securities firm "owed tens of billions of dollars in additional liabilities to its customers and was therefore insolvent," the SEC said.

The Government does not allege Friehling knew of Madoff's illegal Ponzi scheme: [More...]

"Although Mr. Friehling is not charged with knowledge of the Madoff Ponzi scheme, he is charged with deceiving investors by falsely certifying that he audited the financial statements of Mr. Madoff's business," said acting U.S. Attorney Lev Dassin in a statement. "Mr. Friehling's deception helped foster the illusion that Mr. Madoff legitimately invested his clients' money."

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    this should have been (5.00 / 2) (#2)
    by cpinva on Wed Mar 18, 2009 at 12:13:34 PM EST
    a ginormous, day-glo red flag to any SEC examiner. it practically reaches out and smacks you right in the face.

    a sole practitioner, working out of a dinky squat office, with two employees, is charged with auditing a 50 billion dollar fund? this, in and of itself, doesn't meet the minimum requirements of GAAS (Generally Accepted Auditing Standards), and should have quickly clued in the SEC examiners that something wasn't quite all it appeared to be.

    mr. friehling would have had to be blind not to have suspected something wasn't quite kosher with mr. madoff's business, unless he just didn't bother to conduct any minimal tests of the books and records.

    this raises another interesting question: cpa firms are subject to peer review. another, independent firm, is selected by the appropriate state board, to conduct an audit of the auditors. by design, this would include reviews of workpapers, used to support the conclusions of the auditor, to ensure the firm is following GAAS.

    given the size and scope of mr. madoff's business, that would be the first set of workpapers i would want to look at, considering how small mr. friehling's firm is. those workpapers should have raised concerns to the peer review team. yet, they don't appear to have.

    if they did, and it was included in the review team's report, it doesn't seem to have been acted on by the appropriate parties. had it been, mr. madoff's scheme should have been exposed years earlier.

    this is a worst case example of total systemic breakdown. mr. madoff just couldn't be that good, someone (and there were warnings) should have caught on years ago.

    wow (none / 0) (#1)
    by Bemused on Wed Mar 18, 2009 at 11:15:34 AM EST
     Madoff is conducting busines on such a gargantuan scale and his accounting firm is a solo practitioner he pays "between $12,000 and $14,500 a month."


    exactly what I thought (5.00 / 1) (#4)
    by Jlvngstn on Wed Mar 18, 2009 at 01:09:20 PM EST
    how could someone at that price range really provide accounting services to a 50 bn enterprise?

    That is not a red flag, that is a "red phone" ringing off the hook with that old school loud arse ring.


    that was my thought (none / 0) (#3)
    by Bemused on Wed Mar 18, 2009 at 12:22:18 PM EST

    as to the red flag. As an investor I'd be suspicious of that to say the least. that the SEC (and other federal and NY State agencies) didn't see that as a red flag defies belief.

    Also, in the complaint, it is alleged Friehling lied to the accrediting agencies claimng he did not perform audits thus bypassing peer review.

    i had not read down (none / 0) (#6)
    by cpinva on Wed Mar 18, 2009 at 07:11:48 PM EST
    far enough in the complaint to see that.

    Also, in the complaint, it is alleged Friehling lied to the accrediting agencies claimng he did not perform audits thus bypassing peer review.

    however, this is something the SEC should have checked on, when it received complaints about BLMIS earlier, and conducted its own examinations. why they didn't also check with the AICPA is something of a mystery.

    had they done so, mr. madoff's cover might have been blown years earlier.

    at this point, it's unclear to me exactly what the SEC examiners actually did look at, when examining BLMIS' records previously.


    no doubt (none / 0) (#7)
    by Bemused on Thu Mar 19, 2009 at 07:23:06 AM EST
     I would have always assumed that the SEC did something more than file away paperwork relating to securities traders handling portfolios purported to contain 50 billion in assets.

      I'd imagine that many of the investors also so assumed and are not culpable for the type of negligence or wink and a nod understanding that something was amiss with Madoff. The SEC and the blue sky laws were a response to the 29 Crash and intended to revive confidence and trust in our markets. To a great extent that worked spectacularly, but it seems now we need a thorough reevaluation to determine whether the SEC is fulfilling its mission and whether any prudent investor should put faith in required disclosures. If it's this easy to falsify reports and evade detection we've got a huge problem of unknown magnitude.


    Of course (none / 0) (#5)
    by Bemused on Wed Mar 18, 2009 at 01:09:29 PM EST
      Spitzer who was both AG and governor during much of Madoff's run and styled himself the sheriff of Wall St., not only saw no red flags in his official capacities, he personally invested with Madoff.

    This is all wrong (none / 0) (#8)
    by msobel on Thu Mar 19, 2009 at 11:50:07 AM EST
    If we start arresting accountants for fraud just because their clients are running a ponzi scheme and they have to commit fraud, how will we be able to retain the best and brightest of the accountants who will verify our corporations' books?

    By charging this small business owner, the Obama administration is attacking the very heart of American business.  It is the small business man that has made this country great either by being bought out by large corporation or laundering their money or cooking their books.  We cannot persecute them.

    Arthur Anderson ex-pats? (none / 0) (#9)
    by Bemused on Thu Mar 19, 2009 at 12:26:53 PM EST