SEC Charges Madoff Auditor With Fraud

Mar 18 2009 | 12:44pm ET

The Securities and Exchange Commission has charged the auditors of Bernard Madoff's firm with securities fraud, alleging it falsely represented that it had conducted legitimate audits.

In its complaint filed today in federal court in Manhattan, the SEC alleges that from 1991 through 2008, certified public accountant David Friehling and his New City, N.Y, firm, Friehling & Horowitz, purported to audit financial statements and disclosures of Bernard L. Madoff Investment Securities.

The SEC previously charged Madoff, who pleaded guilty to criminal fraud charges last week, with committing securities fraud through a multi-billion dollar Ponzi scheme perpetrated on advisory and brokerage customers of his firm.

The SEC's complaint alleges that Friehling enabled Madoff's Ponzi scheme by falsely stating, in annual audit reports, that F&H audited Madoff Securities’ 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 said that Madoff’s financial statements were presented in conformity with accepted accounting principles and that Friehling reviewed internal controls at the firm, including controls over the custody of assets, and found no material inadequacies. According to the SEC's complaint, Friehling knew that Madoff Securities regularly distributed the annual audit reports to Madoff customers and that the reports were filed with the SEC and other regulators.

According to the SEC, all of these statements were materially false because Friehling, the sole partner of F&H, did not actually audit Madoff’s firm and did not confirm that the securities Madoff purportedly bought on behalf of its customers even existed.

Instead, Friehling allegedly 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 “findings” as required. If properly stated, those financial statements, along with related disclosures regarding reserve requirements, would have shown that Madoff Securities owed tens of billions of dollars in additional liabilities to its customers and was therefore insolvent, the SEC says.

Friehling similarly did not conduct any audit procedures with respect internal controls, and had no basis to represent that Madoff Securities had no material inadequacies, the complaint alleges. Afraid that his work for Madoff would be subject to peer review, as required of accountants who conduct audits, Friehling allegedly lied to the American Institute of Certified Public Accountants for years and denied that he conducted any audit work.

Ever since the collapse of Madoff's Ponzi scheme, the fraudster's use of a small, obscure auditor that operated out of a storefront office in a suburban strip mall has aroused suspicion. Very early in the Madoff probe, it emerged that Friehling had told the American Institute that he did not conduct audits while at the same time certifying Madoff's books.

Among other things, the SEC's complaint seeks permanent injunctions, civil penalties and a court order requiring both Friehling and F&H to disgorge ill-gotten gains.


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