After Madoff, Regulatory Oversight of Auditors Is Back
After Madoff, Regulatory Oversight of Auditors Is Back
JANUARY 9, 2009, 7:02 AM

The Securities and Exchange Commission has quietly backed away from a rule that had allowed the accounting firm that audited Bernard L. Madoff Investment Securities to avoid oversight by a regulator that was created after the Enron and WorldCom scandals, The New York Times’s Floyd Norris reported.

Brokerage firms like Madoff Securities are required to be audited by firms that were registered with the Public Company Accounting Oversight Board, which was created under the Sarbanes-Oxley Act in 2002 to help prevent frauds.

But the S.E.C. promptly issued a rule, which it extended several times, waiving that requirement for privately held brokerage firms. As a result, Friehling & Horowitz, a three-employee accounting firm, was able to continue to audit Madoff without registering with the board. That firm’s audits failed to detect the large Ponzi scheme that Mr. Madoff, the firm’s founder, has now been accused of orchestrating.

In its latest extension of the rule, issued Dec. 12, 2006, the commission said it had determined that allowing such firms not to register was “consistent with the public interest and the protection of investors.”

That extension expired at the end of 2008 and was not extended. As a result, firms that audit broker-dealers for fiscal years that end this month or later will have to be registered.

The registration will not, however, lead to inspections by the board of such accounting firms. Under another section of the Sarbanes-Oxley law, it is allowed to inspect only audits of publicly held companies.

“As a result,” the oversight board said in a statement issued Thursday, “audits of nonpublic broker-dealers, like other private company audits, are not, under current law, subject to board inspection and cannot be the basis for board disciplinary action.

“If a registered firm does no audits of public companies,” the statement added, “the board cannot inspect it.”

State laws generally provide that accounting firms should face a “peer review” by another accounting firm, but a loophole in the New York rules enabled Friehling & Horowitz to escape that review as well.
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