Mr. Friehling – a Future Auditing Case Study

1206 Words Apr 6th, 2010 5 Pages
David Friehling will quite possibly be a future case study in auditing textbooks and courses throughout the United States. Mr. Friehling was the auditor for Bernard Madoff, who was recently convicted of running the largest Ponzi scheme ever uncovered through his business, Bernard L. Madoff Investment Securities, LLC (BMIS). Mr. Madoff claimed to actively oversee more than $65 billion in private investments (it was later revealed that roughly $823 million remained of the more than $170 billion that went through his accounts over the years).(1) Mr. Friehling flagrantly and purposely violated provisions of the American Institute of Certified Public Accountants’ Code of Professional Conduct,(2) Generally Accepted Auditing Standards,(3) …show more content…
None of this occurred. The final section, Standards of Reporting, requires the auditor to state when Generally Accepted Accounting Principles have not been consistently observed. This also did not occur.

The SEC probed Mr. Madoff’s business on numerous occasions for sixteen years. Despite many blatant warning signs, not once was there an investigation that uncovered the fraudulent auditing being performed. Regarding the SEC, Madoff was quoted in a jailhouse interview as saying that “it never entered the SEC’s mind that it was a Ponzi scheme,” and also that he had “too much credibility with them and they dismissed” the idea of a Ponzi scheme.(7)

The SEC contends that from 1991 through 2008 Mr. Friehling violated several different sections of the Securities Act, Exchange Act, and Advisors Act. The SEC alleges Friehling was not aware of the Ponzi scheme, but that he committed securities fraud by falsely representing he had performed legitimate audits, falsely stating the audits were conducted in accordance with GAAS, falsely stating that the financial statements were prepared under GAAP, and knowing that the audit reports were distributed to customers.(8) The charges also include aiding and abetting investment adviser fraud and filing false audit reports to the SEC. Mr. Friehling faces 105 years in prison if convicted of all charges.

The PCAOB, created under the Sarbanes-Oxley Act to help prevent fraud, did not require CPA firms who didn’t audit public

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