Yes, we have located Bernie Madoff’s blog. Although the authenticity of the blog (and that of its ‘commenters’) is a stretch, it makes for a change of pace in what is otherwise a very somber subject.
The House Financial Services Committee has scheduled a hearing for Jan. 5, 2009 on Assessing the Madoff Ponzi and the Need for Regulatory Reform. Bloomberg’s Ian Katz was among the first to report this development in his Dec. 29 article, “Madoff Hearing Set as House Weighs Regulatory Changes.”
Katz quotes Rep. Paul Kanjorski, chair of the Capital Markets Subcommittee of the House Financial Services Committee saying, “These proceedings will help us to discern whether or not the Securities and Exchange Commission had the resources needed to get the job done, how such a sizable scheme could have evaded detection for so long, and what new safeguards we need to put in place to protect investors.”
Diana B. Henriques of the New York Times notes in her article today, Madoff Case Faces Crucial Disclosure Deadline, that: “[Today is] the deadline for Mr. Madoff to provide federal securities regulators with a full accounting of his and his New York firm’s assets — from real estate to art works to bank accounts.” Additionally, she notes: “Judge Louis L. Stanton of United States District Court, who is handling the civil case against Mr. Madoff, is being urged to consider broadening the protections normally available to investors in failed Wall Street firms to allow for the ‘devastating’ circumstances of the Madoff scandal.”
She reports: “Because Mr. Madoff operated a brokerage firm, some of his direct investors may be covered under the Securities Investor Protection Corporation [SIPC], a federal fund created to cover fraud losses in brokerage accounts.“ However, she notes that many of the victims were not direct customers of the Madoff brokerage firm, but instead had invested in various “feeder funds.” One such investor, Daniel Goldenson, says Henriques: “urged Judge Stanton to consider looking past those feeder funds to the individuals ultimately affected by Mr. Madoff’s collapse,” as far as qualifying for SIPC coverage.
Separately, some, including former SEC Chief Accountant Lynn Turner, have questioned how audit firms like Friehling & Horowitz, the three person firm that allegedly audited Madoff’s books (with one active CPA, former New York State Society of CPAs Rockland County Chapter President David Friehling), could have avoided peer review at the state and federal level.
AICPA spokesman William Roberts has been quoted in various articles (including Madoff's Auditor Under Ethics Probe by CPAs Group by Emily Chasan of Reuters) noting the Friehling & Horowitz firm committed in writing to the AICPA for a number of years that the firm was not engaged in audits – and thus was not subject to AICPA peer review requirements. The fact that the Friehling & Horowitz firm signed off on the Madoff audit reports has triggered the ethics investigation by the AICPA.
As far as state peer review requirements are concerned, I had read in WebCPA on Dec. 18 that the New York State legislature recently passed a bill which was awaiting the governor’s signature which would include some beefed up peer review and other requirements. The article, New York Passes Education Law, stated, “The New York State Senate and Assembly have unanimously passed a groundbreaking bill that would amend the laws governing CPAs and provide greater public protections for their clients.” Regarding peer review, the article said “The bill will also require all New York State CPA firms to register and those that provide attest services will have to undergo peer review every three years (exempting sole proprietors and firms with two or fewer accounting professionals, except if they perform state or municipal governmental audits).” Given the exemption as so described, it would appear firms like Friehling & Horowitz would still not be required to have peer review under the State of New York’s new requirements. I checked with AICPA’s Roberts to see if there was a similar exemption at the AICPA for firms with two or fewer audit professionals as far as peer review is concerned, he replied there was no such exemption.
More recently in WebCPA, Howard Wolosky, Editor in Chief of Practical Accountant, wrote about the Madoff saga and other scandals of recent memory, in an article entitled, Human Nature at Work. Wolosky cited in turn an article by William Barrett in the Jan. 12, 2009 issue of Forbes, Madoff Mess is Nothing New – subtitled: ‘The big lesson in the Madoff scandal? How little financial scams change over time.’
I’ve thought about this phenomena as: in this complex world – based on Madoff’s own admission of committing a Ponzi scheme according to the SEC’s press release – he did it the old fashioned way: he simply lied, and apparently falsified documents to backup his story.
This concept of human nature in connection with the Madoff fraud, including concepts carefully constructed by the perpetrator, characterized by Forbes’ writer Barrett, such as the ‘reputation ruse,’ and the ‘affinity quagmire,’ got me to thinking about an interview I listened to recently of incoming SEC Chairwoman Mary L. Schapiro. It’s actually the Nov. 2, 2005 oral history of Schapiro taken by the SEC Historical Society, one of the links we provided about her in our post on Dec. 18 when she was named incoming chair (subject to Senate confirmation) by President elect Barack Obama. At the time of her interview Schapiro had formerly served as an SEC commissioner and as Chair of the CFTC.
One thing Schapiro talked about, right at the beginning of her 2005 interview conducted by Kenneth Durr, was the relevance her undergraduate major in cultural Anthropology held for her as a law student and then securities regulator. I highly recommend you listen to the entire interview, or you can read the transcript. I remember taking one class in cultural anthropology in college, and it was one of my favorite classes; our term paper assignment was to write about how the characters on a TV show of our choice represented a facet(s) of society or something like that. I distinctly remember picking Gilligan’s Island as the chosen microcosm for my paper. (Maybe you remember: ‘Gilligan, the Skipper too, the Millionaire, and his Wife, the Movie Star, the Professor and Marianne, here on Gilligan’s Isle?) Anyway, it really is relevant today, why, even Thurston Howell III can be found as a commenter on Bernie Madoff’s blog.
As we end a tough year for the economy and the markets, I’ll borrow a phrase often used by outgoing SEC Chairman Christopher Cox when he speaks about and to various groups, beginning with his first public remarks as Chair in August, 2005, speaking to the SEC staff, and I’ll say to all those who serve the broader population in regulatory, enforcement, standard-setting, public policy-making and compliance roles, whether incoming, outgoing, or staying the pace, thank you for all you do, and to all our readers, Happy New Year to You!
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