Federal officials filed criminal and civil charges against Bernard Madoff’s auditor on Wednesday, and the AICPA expelled him from the Institute after concluding its own ethics investigation.
In a civil complaint filed in federal court in Manhattan, the SEC alleges that from 1991 through 2008, David G. Friehling and his New York firm, Friehling & Horowitz CPAs PC (F&H), purported to audit financial statements and disclosures of Madoff’s firm.
“Friehling essentially sold his license to Madoff for more than 17 years while Madoff’s Ponzi scheme went undetected,” James Clarkson, acting director of the SEC’s New York Regional Office, said in a press release. “For all those years, Friehling deceived investors and regulators by declaring that Madoff’s enterprise had a clean audit record,” Clarkson said.
The civil complaint filed by the SEC is similar to federal criminal charges brought against Friehling and his firm in a six-count complaint alleging securities fraud, aiding and abetting investment adviser fraud, and four counts of filing false audit reports with the SEC.
On Wednesday, the AICPA concluded its ethics investigation into Friehling’s conduct as an auditor of a broker-dealer and expelled him from membership for failure to cooperate.
The SEC charged Madoff and his firm, Bernard L. Madoff Investment Securities LLC, with committing securities fraud through a multibillion dollar Ponzi scheme. Madoff last week pleaded guilty to 11 felonies and admitted to, among other things, operating a Ponzi scheme, committing securities fraud and investment adviser fraud, and filing false audited financial statements with the SEC, according to the regulator.
The SEC’s complaint alleges that Friehling “enabled” Madoff’s Ponzi scheme by falsely stating, in annual audit reports, that F&H audited Madoff’s firm’s financial statements pursuant to GAAS, including the requirements to maintain auditor independence and perform audit procedures regarding custody of securities.
F&H also allegedly purported that the financial statements conformed to GAAP and that Friehling reviewed internal controls at Madoff’s firm. According to the SEC’s complaint, Friehling knew that the firm regularly distributed the annual audit reports to Madoff customers and that the reports were filed with the SEC and other regulators. The complaint alleges these statements were “materially false.”
The SEC alleges that Friehling “merely pretended to conduct minimal audit procedures” of certain accounts to make it appear that 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 related disclosures regarding reserve requirements by Madoff’s firm, would have shown that the firm owed tens of billions of dollars in additional liabilities to its customers and was therefore insolvent, the SEC said.
According to the SEC’s complaint, Friehling also failed to conduct any audit procedures with respect to internal controls at Madoff’s firm, and had no grounds to represent that the firm had no material inadequacies. Afraid that his work for the firm would be subject to peer review, as required of accountants who conduct such audits, Friehling lied to the AICPA for years and denied that he conducted any audit work, the SEC said.
The SEC’s complaint specifically alleges that Friehling and F&H violated section 17(a) of the Securities Act, violated and aided and abetted violations of section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and aided and abetted violations of sections 206(1) and 206(2) of the Advisers Act, section 15(c) of the Exchange Act and Rule 10b-3 thereunder, and section 17 of the Exchange Act and Rule 17a-5 thereunder.
Among other things, the SEC’s complaint seeks financial penalties and a court order requiring both Friehling and F&H to surrender related gains.