Bernie Madoff accountant, David G. Friehling, was finally stripped of his license after being accused of falsely representing that the financial statement for Bernie Madoff Investment Securities, LLC (BMIS) were audited in accordance with Generally Accepted Auditing Standards (GAAS) and conformed to GAAP.
Some of the more egregious GAAP and GAAS irregularities included:
- Procedures were not performed to confirm existence of securities, on behalf of clients, by BMIS. The most elementary audit procedures would have required BMIS to produce investment statements from the financial institutions at which the securities were held. Since the securities did not in fact exist, these procedures were clearly not performed.
- No audit procedures were performed with respect to internal controls (there were none) despite a (SEC required) statement claiming that there were no 'material inadequacies'.
- To avoid peer review (where accountants review other accountants work), Friehling represent to the AICPA that he did not conduct any audit work.
- Given that Friehling was the sole auditor at his firm, it would have made it extremely difficult to audit an entity the size of BMIS in a timely fashion. Also it was extremely unusual for a company of BMIS' size and prestige to be associated with a completely unknown accounting firm. Also, one would think that the word of mouth alone ("Looking for an accountant? Why don't you use Bernie's? ") would have helped improve Friehling and Horowitz stature and size.
- Friehling and his family had investments worth over $14million with BMIS. The conflict of interest was a blatant violation of CPA rules of professional conduct.
- The financial statements did not adhere to GAAP, including exclusion payables and receivables relating to unsettled trades.
Friehling and Horowitz received approximately $186,000 a year in fees.
Friehling has been charged with securities fraud, investment adviser fraud, filing false reports with the SEC. He has pled guilty, has been cooperating with the government and will be sentenced in September, 2010.