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Date and page printing time: November 21th 2009 05:15 GMT
Trade's Tools | The FOREX market news
DJMN: GETTING PERSONAL: Friehling A Cautionary Tale For CPAs
By Arden Dale
A DOW JONES NEWSWIRES COLUMN
Checking out the auditor of an investment plan before jumping in is always smart, but doesn't always prevent trouble. Take the case of David G. Friehling, the long-time auditor of Bernard Madoff.
Anyone who had entrusted money to Madoff in the glory days of his historic Ponzi scheme, and who decided to study up on how the investments were being audited, would have run up against Friehling. He seemed to be on the up-and-up, and more.
A member of the American Institute of Certified Public Accountants, and president of the Rockland County chapter of the New York State Society of Certified Public Accountants in 2007 and 2008, Friehling sat on the chapter's executive board. He was a "small town CPA who was respected in his community," says Lou Grumet, the executive director of NYSSCPA.
NYSSCPA, of course, later expelled him. In March, the AICPA said it had done the same.
Tuesday, Friehling pleaded guilty to securities fraud, aiding or abetting investment-adviser fraud, obstructing the administration of Internal Revenue laws, and making false filings with the U.S. Securities and Exchange Commission. He faces a maximum of 114 years in prison on the charges.
Also Tuesday, the SEC said Friehling and his accounting firm, Friehling & Horowitz, CPA, PC had agreed not to contest its charges that they enabled fraud by falsely stating they audited Madoff's financial statements. Friehling didn't admit or deny the SEC allegations.
Friehling's former partner in his small storefront accounting firm in New City was Jerome Horowitz, his father-in-law, who had been suffering from cancer and died March 12, the same day Madoff pleaded guilty.
The Friehling story proves again that the Madoff scandal was possible because people were willing to buy into it--in a sense, to suspend disbelief about returns on their investment that weren't ultimately believable, according to Grumet. "It was about greed."
One positive development to come out of the Madoff scandal: It managed to do for New York accounting rules in just months what lawmakers tried to do for years. The New York Accountancy Reform Law, which went into effect on July 26, redid standards for the first time since 1897. Lawmakers had fought over proposed rule changes since 2002 and the spectacle of collapsed WorldCom Inc. Chief Financial Officer Scott Sullian, a New York accountant.
The law is the biggest thing in the history of the New York accounting profession in over a century, and affects thousands of tax advisers, from chief financial officers and treasurers at investment banks to certified public accountants at firms around the state. They face penalties--including having their licenses revoked--for not complying with the law, which requires them to register with the state education board every three years, and more.
Many of those it affects, however, are still in the dark about it, and NYSSCPA has been making an effort to educate the community.
So what is an investor to look for when trying to decipher whether an an accountant is above board?
Find out whether a broker dealer or fund has an auditor that's a known entity, someone registered with the Public Company Accounting Oversight Board or part of the AICPA peer review process. It is legitimate, in fact, to ask an audit firm to see the report card it got in its last AICPA peer review.
Even here, though, appearances can be deceiving. The PCAOB can register some auditors, but through a loophole Congress is thinking about closing, doesn't have authority to inspect all of them.
As for an AICPA peer review: Though Friehling was enrolled in the program, there was no report card on him.
(Arden Dale is a Getting Personal columnist who writes about personal finance; she covers topics including tax and estate planning, retirement, investment strategies, and financial needs of small businesses. She can be reached at 212-416-2234 or by email at arden.dale@dowjones.com.)
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(END) Dow Jones Newswires
November 03, 2009 15:32 ET (20:32 GMT)
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