Case 2.6- Bernie Madoff ACCTG 403W PDF

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Mr. Dionisio mandatory case study memo assignments....

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Memorandum To: Mr. Joe Dionisio Date: 10/25/2016 Re: Case 2.6: Bernie L. Madoff Investment and Securities This case study pretty much goes over briefly what happened in the Bernie Madoff scandal and how the auditors did not perform their duties. Bernie Madoff was running a Ponzi scheme. A Ponzi scheme is “a fraudulent investing scam promising high rates of return with little risk to investors” (investopedia.com). This let the early investors in his fund get very rich while using all of the new investors money to pay the early investors. The accounting firm responsible for auditing Bernie Madoff was Friehling and Horowitz. David Friehling was in charge of auditing the fund and did not perform his duties to investors of the public. This document will describe what responsibilities the auditing firms on Bernie Madoff and the investors should of done if they abided by the laws. To begin with, it is very clear that David Friehling did not exercise due care and maintain professional skepticism throughout the audit. This is one of the most important duties of the auditor because being skeptical will allow the auditor to ask the right questions to figure out of the financial statements are true or not. The Responsibilities Principle states, “an auditor must maintain professional skepticism and exercising professional judgment throughout the audit” (pcaobus.org). Clearly David Friehling was careless and had very little, if any, skepticism. One trait of an auditor that the professor always stresses is to be skeptical and there is nothing wrong with asking too many questions. Some pretty obvious items that were not audited or tested were the liabilities, assets, and sales and revenues. This was stated in the brief overview about the case and these items make up a large portion of the financial statements. The way an auditor can test these items is send out confirmations to confirm that the items are true. Another extreme issue was with the internal control of the Bernie Madoff fund because there was definitely lots of corruption and lack of internal control. One thing the auditor must do is to test whether the internal control system is doing its job and being effective. David Friehling clearly did not test or just looked the away when it came down to internal control. In addition, based on the lack of responsibility by David Friehling, charges were brought up against him by the Securities and Exchange Commission. The SEC “alleges from 1991 through 2008, certified public accountant David G. Friehling and his firm, Friehling & Horowitz, CPAs, purported to audit financial statements and disclosures of the Bernard L. Madoff Investment Securities” (sec.gov). This complaint that was filed by the SEC is true to grounds even though David Friehling did not get charged. The information that was audited by this accounting firm was not relevant or reliable. This is the kind of information that I would of looked for. For the purchases, as the auditor I would reach out to a outside source to help document if the purchases actually happened. This would create reliable information. To see if the fund actually maintained proper custody, as the auditor I would send out confirmations to the banks that was said to be holding the securities.

When it comes to an auditor’s common law liability to third parties, there are three levels of failure to exercise professional care. The first one is ordinary negligence, which means, “failure of duty in accordance with applicable standards due to the lack of reasonable care” (Wikipedia.org). The second is gross negligence, which means, “the lack of concern for the likelihood that injuries will result with due to even minimal care” (Wikipedia.org). The last one is fraud, which means, “misrepresentation of a material fact by a person who is aware of his or her actions, with intentions of misleading the other party” (Wikipedia.org). With respect to the auditing firm for Ascot Partners, BDO Siedmen, there is not enough evidence to show that there was gross negligence or fraud committed by them. Ordinary negligence can be said of BDO because it was unintentional but they still audited Ascot Partners’ financial statements with correct responsibility and care. Furthermore, according to Section 24 of the Securities Act of 1933, “any person who willfully violates any provisions of misstatements in the financial statements should be convicted not more than five years in prison and/or fined $5,000” (sec.gov). According to Section 32 of the Securities Exchange Act of 1934, “there can be criminal penalties for any auditor that willingly and knowingly knew about misstatements in the financial statements” (sec.gov). Based on these sections in both acts, I believe Friehling should face criminal charges because he lied to the AICPA when they asked if he was performing audits for Bernie Madoff firm. He knew that he was lying and therefore can be charged against Section 32 of the Securities and Exchange Act of 1934. On the other hand, I do not believe BDO Siedman should be facing criminal charges for auditing the financial statements of Ascot Partners. They did not willingly and knowingly allow misstatements on the Ascot Partners financial statements and had nothing to do with Bernie Madoff firm financial statements. In conclusion, Bernie Madoff ran one of the largest Ponzi scheme ever with the help of and lack of responsibilities of their auditors. Friehling and Horowitz firm clearly did not care and perform their duties with professional skepticism and should be facing criminal charges because of that. This case study is a great example of what can happen if an auditor does not perform their duties truthful and lacks due care while performing the duties. Auditor can faces harsh penalties if they do not provide truthful information to the public.

Word Cited " //." AU 110 Responsibilities and Functions of the Independent Auditor. N.p., n.d. Web. 24 Oct. 2016. . "Legal Liability of Certified Public Accountants." Wikipedia. Wikimedia Foundation, n.d. Web. 24 Oct. 2016. . Root. "Ponzi Scheme." Investopedia. N.p., 25 Nov. 2003. Web. 24 Oct. 2016. . Securities Act of 1933. Ann Arbor, MI: Xerox U Microfilms, 1974. Web. 24 Oct. 2016. Securities Exchange Act of 1934. Ann Arbor, MI: Xerox U Microfilms, 1974. Web. 24 Oct. 2016....