The second largest fraud in history?

You know, I wanted to blog today about cool planning approaches, but I realized that not commenting on the arrest of former Nasdaq Chairman Bernard Madoff regarding a $50 billion fraud, might indicate that I'm not in touch with current events.

In any other year, the second largest fraud in history would be the only story. Indeed, the first largest (Enron at between $60 billion [Boston Globe] and $80 billion [Senator Mark Dayton]) occupied the headlines in 2001 and 2002 for months - and it spawned the Sarbanes-Oxley Act. Yet, so far, this story is just one dish on a complete menu of bad financial news. So much for, "lets not let this sort of thing happen ever again."

Of course, the biggest question any CIA or CISA should be asking is, "where were the auditors?" The answer is unpleasant even as it is uncomplicated.

According to Philip Broughton commentator for Forbes.com, there were two SEC audits, one in 2005 and one in 2007. According to the AP, the 2005 audit yielded three violations of rules requiring brokers to obtain the best possible price for customer orders, but the 2007 yielded nothing. His assessment is that this is a demonstration of the poor quality of these audits, and others are raising the same point.

Perhaps more importantly, the minimal (if not entirely absent) auditing capability of the firm that signed the financial statements should have been screaming out warnings. Though, according to Bloomberg.com's Dec. 13 story, at least one investment advisor had read the warning signs, Swiss private banks and otherwise conservative foundations were duped.

Bloomberg's story describes,

Hedge fund investment adviser Aksia LLC warned clients not to put their money with Bernard Madoff after learning of “red flags” at his company, including that its books were audited by a three-person accounting firm.

Bernard L. Madoff Investment Securities LLC used Friehling & Horowitz, an auditor operating out of a 13-by-18 foot location in an office park in New York City’s northern suburbs. The auditor signed off on Madoff’s annual financial statement through Oct. 31, 2006, according to a copy obtained by Bloomberg News.

And it gets worse, apparently there is some question whether this firm is actually an ongoing enterprise. According to Bloomberg's story,

Friehling & Horowitz operates from a storefront office in the Georgetown Office Plaza in New City, sandwiched between a pediatrician’s office and another medical office. An office for the Rockland County Bar Association is also in the building.

A woman who works in a nearby office, who didn’t want to be identified, said Friehling doesn’t come to the office regularly. When he does, he is the only person there.

Another woman in a nearby office, Leslie Cousar, said the man who comes to the auditor’s office does so for 10-to-15 minute periods, and wears tight pants and tie-dyed shirts. Cousar said she never saw anyone else going to the office during the day, but at about 5:30 p.m., another man would show up and use the location.

It's hard to not be infuriated by this kind of fraud-in-plain-sight and the damage it will do to an already staggering financial system. But, the fact that so many obvious indicators, including a high degree of secrecy and consistent returns even when they didn't make sense, just makes it worse.

Anyone still thinking a good place to save money is your audit department?