The US Securities and Exchange Commission has charged the auditor of Bernard Madoff’s broker-dealer firm with committing securities fraud by representing that they had conducted legitim
The US Securities and Exchange Commission has charged the auditor of Bernard Madoff’s broker-dealer firm with committing securities fraud by representing that they had conducted legitimate audits, when in fact they had not.
In its complaint filed in federal court in Manhattan, the SEC alleges that from 1991 until 2008, certified public accountant David G. Friehling and his firm, Friehling & Horowitz, purported to audit financial statements and disclosures of Bernard L. Madoff Investment Securities.
The SEC previously charged Madoff (pictured) and his firm with committing securities fraud through a multi-billion dollar Ponzi scheme perpetrated on advisory and brokerage customers of his firm.
"As the new chairman, I will ensure that we continue this investigation and hold accountable all those who helped to facilitate this massive fraud," says SEC chairman Mary L. Schapiro, who took office in January.
James Clarkson, acting director of the SEC’s New York regional office, says: "As we allege in our complaint, Friehling’s and F&H’s misconduct is egregious. Friehling essentially sold his license to Madoff for more than 17 years while Madoff’s Ponzi scheme went undetected. For all those years, Friehling deceived investors and regulators by declaring that Madoff’s enterprise had a clean audit record."
The SEC’s complaint alleges that Friehling enabled Madoff’s Ponzi scheme by falsely stating, in annual audit reports, that F&H audited BMIS financial statements pursuant to Generally Accepted Auditing Standards, including the requirements to maintain auditor independence and perform audit procedures regarding custody of securities.
F&H also made representations that BMIS financial statements were presented in conformity with Generally Accepted Accounting Principles and that Friehling reviewed internal controls at BMIS, including controls over the custody of assets, and found no material inadequacies.
According to the SEC’s complaint, Friehling knew that BMIS regularly distributed the annual audit reports to Madoff customers and that the reports were filed with the SEC and other regulators.
The SEC’s complaint alleges that all of these statements were materially false because Friehling and F&H did not perform a meaningful audit of BMIS, and did not perform procedures to confirm that the securities BMIS purportedly held on behalf of its customers even existed.
Instead, the SEC alleges that Friehling merely pretended to conduct minimal audit procedures of certain accounts to make it seem like he was conducting an audit, and then failed to document his purported findings and conclusions as required under GAAS. If properly stated, those financial statements, along with BMIS related disclosures regarding reserve requirements, would have shown that BMIS owed tens of billions of dollars in additional liabilities to its customers and was therefore insolvent.
According to the SEC’s complaint, Friehling similarly did not conduct any audit procedures with respect to BMIS internal controls, and had no basis to represent that BMIS had no material inadequacies. Afraid that his work for BMIS would be subject to peer review, as required of accountants who conduct audits, Friehling lied to the American Institute of Certified Public Accountants for years and denied that he conducted any audit work.
The SEC further alleges that Friehling and F&H obtained ill-gotten gains through compensation from Madoff and BMIS, and also from withdrawing returns from accounts held at BMIS in the name of Friehling and his family members.
Among other things, the SEC’s complaint seeks financial penalties and a court order requiring both Friehling and F&H to disgorge their ill-gotten gains.
