Madoff Accountant Expected To Plead Guilty; Charges Demonstrate One Of The Pickles In Which ASD Finds Itself

UPDATED 2:03 P.M. EDT (U.S.A.) Prosecutors have advised a federal judge that the government expects David G. Friehling to plead guilty to charges next week.

Friehling was the small-shop accountant for Bernard L. Madoff Investment Securities.

The mere fact that Bernard Madoff’s multibillion firm used a small shop that employed a single accountant — Friehling himself — was enough to make some investors pass on Madoff’s offerings while performing due diligence.

Other investors ignored the incongruity. Madoff’s empire collapsed in December 2008. In July 2009, prosecutors filed a criminal information against Friehling, accusing him of accounting fraud, securities fraud, investment-adviser fraud and making false filings.

In a letter yesterday to U.S. District Judge Alvin K. Hellerstein, prosecutors said they expected to file a superseding criminal information Nov. 3 and that Friehling will plead guilty and cooperate in the government’s ongoing probe.

Read the letter.

Friehling’s experience demonstrates one of the pickles Florida-based AdSurfDaily — itself implicated in an alleged Ponzi scheme — is in.

A hearing was held at ASD’s request Sept. 30 and Oct. 1 of last year to demonstrate it was not a Ponzi scheme. ASD, however, did not call either an in-house or external accountant to the witness stand to certify its books and financial statement, thus missing a chance to refute the government’s Ponzi claims by producing audited financials that could withstand scrutiny.

One of the likely reasons is that no accountant would or could certify ASD’s books under oath in a fashion favorable to the company. To have done so would have been to introduce some of the same elements that led to intense scrutiny directed at Friehling and the criminal information against him.

ASD published no verifiable financial information. There are major doubts that ASD even knew its own bottom line, amid assertions that members siphoned off money before it even arrived at ASD.

One of the allegations against Friehling is that he verified information for Madoff that simply was not true.

Among the assertions against Friehling was that he was not truly independent and was auditing a company in which he had a large personal stake — an investment account dating back to the 1980s that showed an equity balance of more than $500,000 each year.

If ASD employed accountants or bookkeepers who held large numbers of “ad-packs” or were being paid in “ad-packs,” their independence could be challenged.

Moreover, prosecutors said, Friehling’s purported audits did not comply with Generally Accepted Accounting Standards. Reports did not comply with Generally Accepted Accounting Principles.

Any accountant who certified information favorable to ASD, which prosecutors allege was insolvent, almost certainly would have been subjected to the same degree of scrutiny that Friehling later encountered in the Madoff case.

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8 Responses to “Madoff Accountant Expected To Plead Guilty; Charges Demonstrate One Of The Pickles In Which ASD Finds Itself”

  1. GAAP standards do not apply to auditing, they only deal with debits and credits etc.. The standard for auditing is GAAS, and one of it’s primary tenets is auditor independence. As you mentioned, all the Ponzi Schemes who tout they are “doing an audit” are misusing the term, a real audit isn’t done by one of the moderators of the business’s forum, it’s done by a real live CPA who has no other connection to the entity in question. Another problem with the Madoff “audits” is they were done by a one man shop, as you mentioned. By GAAS no audit can be attested to by a single CPA, and thus a person with even a cursory knowledge of accounting would have as a matter of course dismissed any statements made by such a firm. I guess a lot of people just trusted Bernie that much, but after seeing them call Jake Amedee and his ilk “trusted industry insiders” I really can’t say too much about how gullible other people are.

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  2. The mere fact that Bernard Madoff’s multibillion firm used a small shop that employed a single accountant – Friehling himself – was enough to make some investors pass on Madoff’s offerings while performing due diligence.

    I have some questions. Why didn’t a “small shop accounting firm” that employed a single accountant – Friehling himself – raise all kinds of red flags with the SEC and Feds? Don’t the SEC and the Feds do “due diligence” on accounting firms associated with multi-billion dollar investment companies?

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  3. Hi Martin,

    Martin: I have some questions. Why didn’t a “small shop accounting firm” that employed a single accountant – Friehling himself – raise all kinds of red flags with the SEC and Feds? Don’t the SEC and the Feds do “due diligence” on accounting firms associated with multi-billion dollar investment companies?

    Not sure if you saw this report from the Inspector General when we were talking about it here:

    http://sec.gov/spotlight/secpostmadoffreforms/oig-509-exec-summary.pdf

    It’s definitely worth a read.

    There are some comments about the report in this thread:

    http://patrickpretty.com/2009/07/31/anniversary-eve-message-that-altered-lives-appeared-on-asd-website-one-year-ago-tomorrow/

    Regards,

    Patrick

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  4. Madoff: SEC never thought it was a Ponzi scheme
    http://finance.yahoo.com/news/Madoff-SEC-never-thought-it-apf-956147618.html?x=0

    Off topic: Patrick, you have posted about US banks failing recently:
    http://news.yahoo.com/s/nm/20091031/bs_nm/us_usbancorp

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  5. This is an interesting quote from Patrick’s linked article:

    Several issues, including the allegation in the internal e-mails that Madoffs auditor was a related party, were never examined at all. Yet, after Madoff confessed to operating a Ponzi scheme, a staff attorney in NERO’s Division of Enforcement was assigned to investigate Madoffs accountant, David Friehling, and within a few hours of obtaining the work papers, he determined that no audit work had been done.
    http://sec.gov/spotlight/secpostmadoffreforms/oig-509-exec-summary.pdf

    This is an interesting quote from Tony’s linked article:

    In his interview with Kotz, Madoff said the SEC never asked him about his tiny accounting firm. It seemed incongruous that, with more than $65 billion in private investments he claimed he oversaw for thousands of people, Madoff used what seemed to be a small-time auditor with a minuscule office in suburban New City, N.Y. Authorities say that Friehling appeared to have rubber-stamped Madoff’s records.
    http://finance.yahoo.com/news/Madoff-SEC-never-thought-it-apf-956147618.html?x=0

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  6. Here are some interesting quotes from a linked article:

    “I worried every time,” Madoff said in the interview. “I wish they caught me six years ago, eight years ago.”

    Prosecutors say Friehling never performed an audit of Madoff’s company.
    http://www.cbsnews.com/stories/2009/10/31/eveningnews/main5477864.shtml?tag=contentBody;featuredPost-PE

    I wonder if Andy Bowdoin, of ASD infamy, wishes he was caught several years before his BoA bank accounts were frozen.

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  7. It’s rather interesting to note that Madoff already knew, years earlier, that he couldn’t “fix” his illegal Ponzi scheme and somehow make it legal. He simply resigned himself to the fact that eventually his illegal Ponzi scheme would be exposed for what it really was.

    In the same way, Bowdoin also knew that he couldn’t “fix” his illegal ASD Ponzi scheme and somehow make it legal. But rather than resign himself to that fact, he came up with the most incongruous cover, ever – that Bowdoin was the only one smart enough to understand the ASD “business model.”

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  8. This is akin to Bowdoin telling his one hundred thousand-plus ASD members, “Shut up and quit asking questions. You’re too stupid to ever understand this ASD stuff. Let me (Bowdoin) do all the thinking for you.”

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