called2account

It’s not enough that their world view has been shattered. 

From The Jewish Daily Forward:

 

Separately, in a second lawsuit, Scott Berrie, an investor in Gabriel Partners, another investment partnership managed by Merkin, is suing Gabriel and BDO Seidman, the auditor, for alleged securities fraud and negligence.

And from Business Week:

“…more than 100 people who have contacted a Long Island (N.Y.) law firm that has filed a class-action suit against Madoff’s investment company…

So far, the list includes Carl Shapiro, a 95-year-old former garment industry executive who reportedly had $400 million of his personal wealth invested with Madoff, as well as $145 million from his family foundation; Irwin Kellner, chief economist for MarketWatch and the lead plaintiff in the class action, who invested more than $2 million; and Lawrence Velvel, 69, dean of the Massachusetts School of Law, who told the Associated Press he and a friend may have lost millions of dollars between them in bad Madoff investments.”

Yesterday, Stephen Grendel of Time Inc.com asked the question, “How Culpable Were The Auditors?”

I spoke to him on Thursday and he told me that the lawsuits so far primarily focus on investors in feeder funds that put substantially all or a very large percentage of their assets in Madoff’s funds. Whereas you may not expect an auditor to verify existence or valuation of underlying assets of a fund that was a non-material asset on another fund’s balance sheet, if Madoff’s funds were the whole balance sheet, the entire portfolio of a foundation of a feeder fund, you would expect their auditors woud kick the tires harder, go check out the operation, look for the assets and verify the balances in person. This is expecially true given the fact that Madoff’s operation was performing all of the roles - investment advisor, brokerage, trade clearing and asset custodian. This is highly unusual.

And so is the fact that a fund of this size woud be audited by a three person firm that no one else had ever heard of.

Desispite these obvious warning signs, ones that were enough to turn a few others off, including Société Générale who blacklisted Madoff’s funds,  the Center for Audit Quality, the audit industry lobbying group, says the auditors did everything they are supposed to do.

Cindy Fornelli, executive director of the Center for Audit Quality, which is a Washington-based public-policy organization that represents public-company auditors, contends that all the Madoff case amounts to is a lack of sufficient regulation, not a failure of the accounting profession. “It is not the responsibility of the accountant for a capital-management firm to audit the underlying investments of the firms it invests in,” says Fornelli. “The auditor is not in a position to test the existence of the underlying securities — especially in a fund-of-funds situation.”

Looks like some are already setting up the auditors to use the “I was duped” defense. Probably not a bad idea since being judged complicit or incompetent is not very appealing

And now we find that the hinky-dink firm that was Madoff’s auditor has never submitted to a peer review, even though it is enrolled in the AICPA’s program and it’s only active accountant is a past president of his county’s chapter of the New York State Society of CPAs.

Friehling & Horowitz, is now also being investigated by the American Institute of Certified Public Accountants, the prestigious body that sets U.S. auditing standards for private companies.

The problem: The auditing firm has been telling the AICPA for 15 years that it doesn’t conduct audits. Friehling & Horowitz is enrolled in the [peer review] program but hasn’t submitted to a review since 1993, says AICPA spokesman Bill Roberts. That’s because the firm has been informing the AICPA — every year, in writing — for 15 years that it doesn’t perform audits…

Meanwhile, Friehling & Horowitz has reportedly done just that for Madoff. For example, the firm’s name and signature appears on the “statement of financial condition” for Madoff Securities dated Oct. 31, 2006. “The plain fact is that this group hasn’t submitted for peer review and appears to have done an audit,” Roberts says. AICPA has now launched an “ethics investigation,” he says.

The latest news from The Financial Times, just when you thought it could not get any worse, any uglier… 

It appears that the auditors missed a whole boatload of irresponsible lending by some very large banks. They skipped the step of verifying assets on the books of these large banks, loans made to the feeder funds so they could triple or quadruple their investments in the Madoff funds.  There was no review by the auditors of the underlying assets, the securities supposedly in the Madoff funds which were the collateral for the loans.

“Leading banks from Britain, France and Japan helped investors treble or quadruple bets on Bernard Madoff by lending billions of dollars to “feeder” funds, which placed their money with the alleged fraudster.

HSBC, Royal Bank of Scotland, Nomura and BNP Paribas lent the money without spotting a fraud, and in at least one case without due diligence teams visiting Mr Madoff’s brokerage, which held the assets.  Banks including Nomura and Spain’s BBVA also helped create special “notes”, structured products that allowed small investors or those barred from investing in offshore vehicles to put as little as $50,000 into Madoff feeder funds….

Bankers said they had done everything they could, including checking the auditor and regulatory reports, and could not have been expected to spot a fraud.

“The lending bank clearly looks at all the data available, looks at the audited material, what the regulators have said, does a site visit to the fund of funds [feeder fund]: they go through everything,” said one bank facing a big potential loss…”

Another are of potential liability for the auditors will develop if it turns out that any Big 4 or next tier firms were hired by feeder funds or banks to do due diligence on Madoff.  Where are those due diligence reports? If these reports do not exist or end up being the sham that it appears the end result implies, then more plaintiff’s claims of complicity, incompetence or “duped-ness” of the auditors are inevitable.

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