Without Admitting or Denying . . .

Today the SEC announced that Bernard Madoff’s auditors have agreed not to contest the SEC’s charges that they enabled Madoff’s fraud by falsely stating they audited the convicted fraudster's financial statements in accordance with the relevant accounting and auditing standards.

David G. Friehling and Friehling & Horowitz, CPA’S, P.C. (“F&H”) consented to a partial judgment without admitting or denying the allegations of the SEC's complaint, filed on March 19, 2009.

The SEC’s March 19, 2009 complaint alleged, among other things, the following:

Friehling failed to perform any meaningful audit procedures relating to BMIS;

[O]nly three procedures that even resembled audit tests were performed -and even these were mere fiction and virtually irrelevant to an audit opinion

Friehling and F&H obtained ill-gotten gains through compensation paid to them by Madoff and BMIS and also by withdrawing millions of dollars from accounts held at BMIS in the name of Friehling and his family members; and

Friehling falsely represented to the American Institute of Certified Public Accountants (“AICPA”) that he was not engaged in audit work, thereby avoiding the AICPA's peer review requirements applicable to auditors.

To be sure, these were egregious and continuous audit failures occurring from 1991 to 2008, and enriched Friehling and his family at the expense of multitudes of investors. The SEC, however, was unwilling to compel Friehling to admit his culpability. In fact, the SEC has historically allowed individuals and companies to simply pay a fine without compelling an admission of wrong doing.

The SEC’s failure not to compel admissions of culpability allows individuals and companies to assert that the settlement was not to due to culpability but expediency. For example, Bank of America (“BofA”), cited in its papers that the reason for its $33 million settlement with the SEC, in connection with its alleged failure to disclose the Merrill bonuses was not due to wrongdoing on its part, but because “[BofA] would have to spend corporate funds whether or not it settled.”

Did Friehling also settle out of expediency? The SEC must focus on accountability by requiring individuals to admit liability before the SEC will agree to a settlement. If the individuals in question refuse to admit their alleged offenses, then the SEC must use its arsenal of statutory and legal resources.