SEC charges Madoff auditor with fraud

The Securities and Exchange Commission has charged Bernard Madoff's auditors with fraud in connection in what is thought to be the biggest scam in history.

David G Friehling and his firm Friehling & Horowitz, have been accused by the US watchdog of saying it had conducted legitimate audits, when in fact it had not.

In its complaint filed in federal court in Manhattan, the SEC alleged that from 1991 until 2008, certified public accountant Friehling and his firm '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 Generally Accepted Auditing Standards.'

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, the SEC said.

The SEC previously charged Madoff and BMIS with committing securities fraud through a multi-billion dollar Ponzi scheme perpetrated on advisory and brokerage customers of his firm.

F&H also made representations BMIS accounts were GAAP compliant. The sign-offs also said 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.

James Clarkson, acting director of the SEC’s New York Regional Office, said, '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.'

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 added.