Bernard Madoff was able to produce and conduct an astronomical Ponzi scheme that lasted for at least twenty years by creating a system of trust. He convinced investors with promises of great returns, and on paper, it appeared that their money was growing. He used newer investments to pay back earlier dividends. Investors included individuals, businesses, charities, and even schools. Most of these groups lost millions of dollars. Madoff falsified reports to make people think that everything was on the up and up. In order for these reports to pass reviews, he hired an independent CPA to audit his records (Yang). David Friehling helped perpetrate the crime by signing off on audits and other accounting reports without actually producing any review (Accounting Web).
The American Institute of Certified Public Accountants (AICPA) has a Code of Professional Conduct, which ultimately a document which guides certified public accountants on the best methods of behavior. The code is much more than recommendations, in fact, members of the group are required to behavior in the manners which are outlined in the document to provide the best possible service to clients (American Institute of Certified Public Accountants, Inc.). From 1993, all the way through to his accusations in 2009, David Friehling admitted to the AICPA, in writing, that he was not performing any audits. By admitting this, he was not assigned a review by a peer. In order to continue to produce the fake audits for Madoff Securities he would need to avoid a peer review. Friehling broke the Code of Professional Conduct by lying to the AICPA, charging for services that weren’t rendered, and avoiding a peer review for the extremely basic audits that were completed (Accounting Web).
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The SEC was extremely concerned about Friehling’s role in the Ponzi scheme conducted by Bernard Madoff and Madoff securities. SEC alleged that he knew that the annual audit reports that he signed off on were given to investors as well as were filed with the proper authorities and therefore he was at fault. His audits were incomplete because he never actually produced the audit or reviewed what was already done. He made no attempt to verify any information. He also failed to verify assets, examine the sources of revenue, examine bank accounts, review liabilities, and check on the purchase and custody of the securities owned by the company. The SEC further challenged that Friehling did not remain as an independent entity while auditing for Madoff Securities. The Friehling family had investments with Madoff Securities and withdrew at least $5.5 million, creating an obvious conflict of interest (Accounting Web).
The scheme that Madoff perpetrated cost individuals and groups millions of dollars. He was able to swindle and steal all of this money with a little wit and charm, but he wouldn’t have been able to produce such an enormous scheme all by himself. He needed the help of many different people including an independent auditor which he found in Friehling. Friehling clearly understood the role he was playing. He was probably paid handsomely to look the other way and only sign off on the reports he was given. If he had done any auditing as, he said he would have quickly found issues with the Ponzi scheme. Friehling must be guilty of the charges brought against him.
Madoff was able to conduct his Ponzi scheme in large part because of the work that Friehling did for him. Friehling signed off on the audit and other accounting reports for Madoff Securities. His signature indicated to investors that the information that they were reading was, in fact, accurate. Unfortunately for thousands of investors, the information was not real, and neither was the auditing work that Friehling conducted.
- Accounting Web. “Madoff’s accountant: When is an auditor not an auditor?” 30 March 2009. Accounting Web. Web. 3 February 2015.
- Yang, Stephanie. “5 Years Ago Bernie Madoff Was Sentenced to 150 Years In Prison – Here’s How His Scheme Worked.” 1 July 2014. Business Insider. Web. 30 February 2015.
