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Mr. Friehling – A Future Auditing Case Study

1215 words - 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 ...view middle of the document...

They have an obligation to serve public interest, honor public trust, and be independent in fact and appearance when providing auditing and attestation services. The Code of Professional Conduct also declares that any member CPA “assumes an obligation of self-discipline above and beyond the requirements of laws and regulations”.(4) Mr. Friehling clearly violated every one of these AICPA requirements

The AICPA is also responsible for organizing peer reviews of members’ audit records. Mr. Friehling lied to the AICPA for years telling them that he did not perform audits. According to New York law, this enabled him to not be subject to peer review, which would have undoubtedly revealed his deceitful auditing work. This loophole has officially been closed – New York’s State Senate passed legislation in January 2009 that requires peer review as a CPA licensing requirement.(5)

Rule 101 – Independence, of the AICPA Code proclaims that covered members are prohibited from owning any stock or other direct investment in audit clients because it is potentially damaging to audit independence. Mr. Friehling freely violated this rule by owning investment accounts with BMIS worth more than $14 million. He and his family withdrew more than $5.5 million since 2002 (money that is surely gone by now, but that other investors would be very happy to have returned to them).(6)

Mr. Friehling also violated Generally Accepted Auditing Standards.(3) The General Standards state an auditor must maintain independent in mental attitude in all matters related to the audit and that the auditor must exercise due professional care in performing the audit and preparing the report. This did not occur. The Standards of Field Work state that an auditor must adequately plan the audit. They must obtain sufficient understanding of the client and their internal controls to assess the risk of material misstatement due, among other things, to fraud. Lastly, they must obtain sufficient appropriate evidence by performing audit procedures as a basis for their opinion regarding the financial statements being audited. 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...

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