FASB Releases Proposed Impairment Guidance (Re: 99-20); Today’s Madoff Update

FASB issued a press release Friday night Dec. 19 that it has released the first of two proposed FSPs to address concerns arising from the current financial crisis relating to accounting for financial instruments, and that a second proposed FSP will be issued this week.

• Proposed FSP EITF 99-20-a, Amendments to the Impairment and Interest Income Measurement Guidance of EITF Issue No. 99-20, was posted Friday night and the comment deadline is December 30, 2008.
• Proposed FSP FAS 107-a, Disclosures about Certain Financial Instruments, will be released within a week, according to FASB, with a comment deadline of January 15, 2009.

It is impressive that FASB kept to its promise of releasing the proposed FSP on Friday, even with the snow-storm that closed FASB’s offices (according to the outbound voice message on their main number) as well as many other offices in the NY-NJ-CT area.

IASB Posts Proposals, Other Documents Relating to Credit Crisis

In the past few days, the IASB has posted a number of documents relating in part to the credit crisis:

• IASCF publishes update on responses to the G20 conclusions (Dec. 17)
• IASB publishes proposed new Consolidation standard as part of comprehensive review of off balance sheet risk (Dec. 18)
• IASB provides update on steps taken in response to the global financial crisis (Dec. 19

Today’s Madoff Update…
Perusing the New York Post for an article on yesterday’s snowstorm (linked in the first item above) – a newspaper not routinely cited in accounting and legal blogs but appreciated by some as giving a more colorful take on things - I noticed they have an article today on, “Madoff’s Auditor Gave Lessons on Ethics.” The article, by Paul Tharp, says of David Friehling, one half of audit firm Friehling & Horowitz, (and by some accounts, one-third of the three person firm) which purportedly audited Madoff’s investment company, states:

• “The little storefront accountant who was supposed to have audited Bernard Madoff's books may have had a blind eye for numbers - but his mouth seemed to work overtime boasting about ethics…. In an accounting magazine, The Trusted Professional, he wrote an article exhorting colleagues not to cheat. “When we see our clients and they ask us to stretch the truth, we are just cheating ourselves," he wrote in the magazine's April issue. "When those clients . . . ask you to stretch (or shrink) the numbers a little bit, remember not only your professional ethics and responsibilities, but your personal ones as a citizen of the United States. If nothing else, remember your basic math."

We told you about Friehling’s April column which appeared in the New York State Society of CPA’s newsletter, Cheating on Taxes is Cheating on Ourselves and his May column, The More You Give, The More You Receive in our post, Madoff: Mystique or Mistake, when the story first broke last week.

The latest news about Madoff’s audit firm, and about some major audit firms that audited “feeder funds” into the Madoff fund, comes via Francine McKenna’s Re: The Auditor’s blog, in her post “If Its Not One Thing, It’s Another – Auditors Getting Sued Over Madoff. Among other info, McKenna provided a link to Madoff’s Auditor… Doesn’t Audit?, by Alyssa Abkowitz, which notes that the AICPA requires member firms registered to audit to submit to the AICPA’s peer review program, and states:

• "Friehling & Horowitz is enrolled in the program but hasn't submitted to a review since 1993, says AICPA spokesman Bill Roberts. That's because the firm has been informing the AICPA -- every year, in writing -- for 15 years that it doesn't perform audits.
• "Meanwhile, Friehling & Horowitz has reportedly done just that for Madoff. For example, the firm's name and signature appears on the 'statement of financial condition' for Madoff Securities dated Oct. 31, 2006. 'The plain fact is that this group hasn't submitted for peer review and appears to have done an audit,' Roberts says. AICPA has now launched an 'ethics investigation,' he says."

The only way I can imagine audit firm Friehling & Horowitz getting out of this unscathed, is if Madoff pulled a Dreier and falsified documents – in Madoff’s case, if he falsified a Friehling & Horowitz auditor’s report. That would also explain the failure of the audit firm to submit to peer review.

However, if the audit firm did in fact conduct the audit, even if they claim they were defrauded by Madoff, - e.g. by being shown fake documents - there is the possibility they could be found negligent for performing inadequate audit procedures (and more specifically, for not performing an audit in accordance with professional standards as established by the AICPA, which sets standards for audits of non-public companies) that may have established the veracity of the claimed assets through some type of third party confirmation. Determining the role of other audit firms with respect to their professional responsibilities in auditing feeder funds may be more complex, as discussed at more length, including a quote by Cynthia Fornelli, Executive Director of the Center for Audit Quality, in McKenna’s Re:The Auditors blog.

Securities Mosaic also posted a Spotlight on Bernard Madoff this week, gathering together a host of documents on the case, including SEC releases and court orders in the Southern District of New York, law firm memos, news stories, blog posts and more.

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