With a $65 Billion Ponzi scheme in play and Bernie Madoff electing to plead guilty, it is no great surprise that others will being to fall as the government widens the responsibility net for the largest Ponzi scheme in US history.
I must admit this hits home and was something I expected. Although I wish I could say something different, I, too, was a CPA, created a Ponzi scheme and spent time in Federal prison. It is no fun. And, without a doubt, Friehling will spend time there himself – although my guess – his sentence will much longer than mine.
Yesterday, David G. Friehling, CPA (licensed in the State of New York) was charged with securities fraud, aiding and abetting investment adviser fraud, and four counts of filing false audit reports with theExchange Commission (“SEC”). Friehling is the sole practitioner at Friehling & Horowitz, CPAs, P.C. in New York. As a point of reference, Friehling was the son-in-law of Jerome Horowitz (his former accounting partner) who didn’t live to see it all unravel. He dided on March 12, the day Madoff plead guilty.
According to a news release issued by the US Attorney’s office:
From 1991 through 2008, F&H was the accounting firm retained by BLMIS (Bernie L. Madoff Investment Securities) purportedly to audit BLMIS’s financial statements. FRIEHLING created BLMIS’s certified and purportedly audited financial statements, including balance sheets, statements of income, statements of cash flows, and reports on internal control. FRIEHLING falsely certified that he had prepared such statements in accordance with Generally Accepted Auditing Standards (“GAAS”) and in conformity with Generally Accepted Accounting Principles (“GAAP”). Those financial statements were filed with the SEC and sent to clients of BLMIS. BLMIS paid FRIEHLING approximately $12,000 to $14,500 per month for his services between 2004 and 2007.
Sorry, but before going any further, one must question the payment. $14,500 a month is a small price to pay for disgusing a fraud considering that Friehling will be facing certain loss of his license and a lot of time in Federal Prison. But, there is more… the news release goes on to say:
FRIEHLING failed to conduct audits that complied with GAAS and GAAP by, among other things, failing to: (a) conduct independent verification of BLMIS assets; (b) review material sources of BLMIS revenue, including commissions; (c) examine a bank account through which billions of dollars of BLMIS client funds flowed; (d) verify liabilities related to BLMIS client accounts; or (e) verify the purchase and custody of securities by BLMIS. FRIEHLING also failed to test internal controls as required under GAAP and GAAS standards. For example, FRIEHLING did not take any steps to test internal controls over areas such as BLMIS’s redemption of client funds, the payment of invoices for corporate expenses, or the purchase of securities by BLMIS on behalf of its clients. Further, commencing at least as far back as 1995, FRIEHLING did not maintain professional independence from his audit client, BLMIS. Specifically, FRIEHLING and/or his wife had an account at BLMIS with a year-end net equity of more than $500,000 — the maximum amount that, under SEC rules, he could have invested with a broker-dealer client and still maintain his independence.
According to the SEC’s complaint, Friehling similarly did not conduct any audit procedures with respect to BMIS internal controls, and had no basis to represent that BMIS had no material inadequacies. Afraid that his work for BMIS would be subject to peer review, as required of accountants who conduct audits, Friehling lied to the American Institute of Certified Public Accountants for years and denied that he conducted any audit work.
Articles in Forbes stated the following:
“Friehling essentially sold his license to Madoff for more than 17 years while Madoff’s Ponzi scheme went undetected,” said James Clarkson, acting director of the SEC’s New York Regional Office. “For all those years, Friehling deceived investors and regulators by declaring that Madoff’s enterprise had a clean audit record.”
Madoff has said his business didn’t become a Ponzi scheme until the early 1990s, around the time that Horowitz retired and Friehling took over. He was not accused of wrongdoing in the court complaint.
Numerous reports claim that Friehling and family had $14 million invested with Madoff two months before his confession to the largest financial fraud in US history. Since 2000, Friehling withdrew about $5.5 million from those accounts, the SEC stated.
WHERE FROM HERE?
Bernie Madoff, while perhaps brilliant (in his own way) is not capable – in my opinion – of pulling off a fraud of this magnitude without help. I am not suggesting that Friehling knew about the Ponzi scheme (he says he didn’t), but it is likely that he’ll be found guilty on most of the charges as there is no doubt that he’s (at a minimum) negligent. Selling his license for money seems very clear.
But, from these headlines, I suspect there will be a demand for more “accountability” for audited financial statements and regulations placed on compliant CPA’s. That is not the answer. I have stated before and will again, you cannot legislate or regulate ethics or morality. If a person elects to be dishonest…they will be dishonest regardless of the rules in place.
Friehling was a puppet for Bernard Madoff. Most people (although most will deny it) have a price. It appears that Friehling’s price wasn’t all that much. Comfortable yes – rich no! And knowing that his reputation is ruined, his license all but gone and many many years in prison facing him, I know that Friehling wishes he’d never met Bernie Madoff. Hind sight is 20/20 and there is no doubt with all that is facing this CPA – Friehling is just beginning to face the consequences of his choices.
Every choice has a consequence!
My prediction – Friehling isn’t the only pawn is this massive fraud to fall. There will be others so stay tuned…
FRIEHLING, 49, faces a statutory maximum sentence of 105 years in prison.
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