Thursday, February 19, 2009


A few people have asked me to comment on the article in yesterday's WSJ regarding the accounting firms that did work for the Madoff feeder firms. The article suggested that the feeder firms auditors may be liable for not uncovering the Madoff fraud.

I am not an expert on auditor liability. However, I have worked on several matters regarding failed audits. In my view, any liability may depend on the materiality of the Madoff investments to the particular fund being audited.

If a feeder fund had 100% of its investments with Madoff, as some did, it seems to me that the feeder fund auditor has to do more than send a year-end confirmation to Madoff confirming the securities held on behalf of the feeder fund. The auditor would have to do more verification of the investments controlled and held by Madoff. And if the auditor did such work, there would have to be a questions as to the lack of segregation of duties, quality of Madoff's audit firm and other items.

On the other hand, if the feeder fund had 5% of its investments with Madoff, it seems that sending a year-end confirmation with some post-year end testing would suffice. After all, if the same amount of investments was held by JP Morgan, no one would expect the feeder fund auditor to visit to JPM to do further audit work.

Oh, there is a the fund that is suing its own auditor for not uncovering the Madoff fraud. Really?? Let me get this straight. You charged your investors to invest their money. You invested it with Madoff. After you invested it with Madoff there wasn't much to do, other than attract more investors with more money. So, this must mean you did sufficient due diligence to decide to put a meaningful amount with Madoff. And now you are blaming the auditor?? Weak, very weak.

Cheers, Mike


  1. In the case of Fairfield Greenwich Group, they "auditor shopped" their way to favorable (and fresh) auditors who had little experience in the ways of Madoff. In fact, they asked only for a month end statement from Bernie (by then he had simply changed the account value and put it into T-bills) and accepted that as sufficient.

    PWC Canada knows it has some serious flaws in their expected defense. SHould make for some interesting discovery?

  2. Anon, I guess people believe what they want to believe. I once worked as an expert on an audit failure. The accounting firm's work was so poor that its insurance company settled during discovery which is highly unusual.