Question

Bernard Madoff was convicted in 2009 of running a Ponzi scheme, the biggest in U.S. history. A Ponzi scheme is essentially the process of taking money from new investors on a regular basis and using the cash to pay promised returns to existing investors. The high and steady returns received by existing investors are the attraction for new investors, but they are not real returns from investments.
As long as new investors keep contributing and existing investors do not seek redemptions, or the return of their money, the scheme continues. However, eventually, as in the Madoff situation, circumstances change, the scheme is discovered, and the remaining investors find that their capital has disappeared.
At age 71, Madoff was sentenced to prison for 150 years and will die in jail. Now that Madoff is behind bars, attention has turned to Madoff's auditor, David G. Friehling. Friehling is accused of creating false and fraudulent audited financial statements
 for Madoff's firm, Bernard L. Madoff Investment Securities LLC. Prosecutors allege that these fraudulent reports covered the period from the early 1990s to the end of 2008.
Required
(a) Research the progress of the case against David Friehling. Write a report explaining his alleged role in the Madoff Ponzi scheme and the current (at the time you write your report) state of the legal action against him.
(b) Friehling was subject to U.S. auditing standards and legislation. Explain if, and how, Friehling's alleged actions would violate Canadian auditing standards and professional ethics.

Answer 1

(a)        They should conduct a literature review and write a report of the current state of the legal case.

 

There are several useful texts explaining the Madoff affair including:

•   Markopoulos, H., No one would listen, Wiley (2010)

•   Arvedlund, E., Too Good to Be True: The Rise and Fall of Bernie Madoff, Penguin (2009).

 

(b)         These are likely to include CAS 200 (conduct of an audit), CAS 220 (quality control), CAS 230 (was there appropriate documentation?), 240 (fraud factors - were they properly identified?), CAS 315 (understanding the client and assessing risk – did the auditor understand the business of hedge funds and assess Madoff’s control systems?), CAS 330 (responding to assessed risks – did the auditor respond appropriately to any risks identified?), CAS 500 (audit evidence – was it sufficient and appropriate?).

A summary of the allegations again Friehling from the most recent court documents and media reports should be tested against relevant provisions of the rules of professional conduct (e.g., lack of independence, competence, professional behavior and due care allegations), and standards.