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...difference between this case and other hedge fund frauds in which auditors have been held liable is that Madoff was not actually a client of any of the large auditing firms. Madoff's firm used the small New City, N.Y., accounting firm Friehling & Horowitz - which reportedly had offices in a strip mall and had only three employees, including a secretary, an accountant and a partner in his seventies who lived in Florida. Industry experts now say that the size of Madoff's accounting firm should have been a giant red flag...
...course, many of the people who invested money with Madoff didn't know they were relying on a rinky-dink accounting firm to watch over their investments. That's because more than half of the $25 billion-plus in losses investors have so far claimed came to Madoff through so-called feeder funds. These funds were set up by outside firms, which would then funnel the money they received from investors to Madoff. Unlike Madoff's, all the firms running feeder funds had well-known accounting firms listed as their auditors. So, for instance, when investors put money...
...spokesperson from KPMG says that the firm's audit of the Rye Select Broad Market fund conformed to all professional standards and that the firm would vigorously defend its work. A BDO Seidman spokesperson says that his firm is not and has never been the auditor of Madoff Securities. The BDO spokesperson also says that his firm's audit of Ascot Partners met professional standards and that the firm would defend its work. "It is unfortunate that these investors would bring legal action before all of the facts are known and seek to blame others for their own investment decisions...
...Audit Quality, which is a Washington-based public-policy organization that represents public-company auditors, contends that all the Madoff case amounts to is a lack of sufficient regulation, not a failure of the accounting profession. "It is not the responsibility of the accountant for a capital-management firm to audit the underlying investments of the firms it invests in," says Fornelli. "The auditor is not in a position to test the existence of the underlying securities - especially in a fund-of-funds situation...
...Accountant Ronald Niemaszyk, whose firm, Jordan Patke & Associates, specializes in reviewing the books of hedge funds, agrees that in many cases it is common to rely on brokerage statements when auditing funds. But in this case, Niemaszyk says, the auditors most likely should have looked deeper. "You have to look at the auditors' work that you are relying on," he says. What's more, Madoff acted as his own broker instead of going through another firm...