David G. Friehling
Encyclopedia
David G. Friehling is an American accountant who was arrested and charged in March 2009 for his role in the Madoff investment scandal
. He later plead guilty to these charges.
, north of New York City, and attended high school in Liberty, New York
. His affluent family owned the Stevensville Hotel, a prominent Borscht Belt
resort in Swan Lake, New York. He is a 1981 graduate of Cornell University
, and a past-president of the Rockland
chapter of the NYS Society of CPA
s (NYSSCPA).
; a small town north of New York City. The firm consisted of two principals—Friehling and Jerome Horowitz—and a secretary.
Horowitz met Madoff in 1963, when the Madoff organization was a penny stock
trader. He audited Madoff's books before retiring to Palm Beach Gardens, Florida
in 1991 and handing the account to his son-in-law, Friehling. Horowitz died on March 12, 2009 after a long battle with cancer; it is not known whether he was a target of the Madoff investigation.
Well before the Madoff scandal broke, several observers doubted that a tiny firm with only one active accountant could competently service a firm that had grown into a multi-billion-dollar operation. In 2007, Askia LLC, a hedge fund consultant, warned its clients to stay away from Madoff for that very reason; its CEO, Jim Vos, likened this situation to General Motors
being audited by a three-person firm. Others were suspicious that Madoff refused requests for due dilligence because his accountant—supposedly his brother-in-law—was the only one allowed to see the books.
Soon after the Madoff scandal broke, it emerged that Friehling & Horowitz had informed the American Institute of Certified Public Accountants
in writing since 1993 that it didn't conduct audits. An investigation into Friehling by Rockland County district attorney
Thomas Zugibe was stopped in deferral to the investigation by the United States Attorney for the Southern District of New York.
Friehling was not registered with the Public Company Accounting Oversight Board
, which was created under the Sarbanes-Oxley Act
of 2002 to help detect fraud. Nor was the firm "peer review
ed," in which auditors check one another for quality control
. According to the AICPA, Friehling was enrolled in their peer-review program, but was not required to participate because he supposedly didn't conduct audits. It later emerged that Madoff's banker, JPMorgan Chase, had known that Friehling wasn't registered with the PCAOB or subject to peer review as early as 2006.
, aiding and abetting investment adviser fraud, and four counts of filing false audit reports with the Securities and Exchange Commission.
On July 10, 2009, Friehling waived indictment and pleaded not guilty to criminal charges. He agreed to proceed without having the evidence in the criminal case against him reviewed by a grand jury at a hearing before U.S. District Judge Alvin Hellerstein
in Manhattan.
On November 3, 2009 he pled guilty to the charges against him. He admitted to simply rubber-stamping Madoff's filings with the SEC. He also revealed that he continued to audit Madoff even though he had invested a substantial amount of money with him. Accountants aren't allowed to audit broker-dealers with whom they're investing. He agreed to forfeit $3.18 million in accounting fees and withdrawals from his account with Madoff. Friehling faces a maximum sentence of 108 years in prison, but unlike Madoff has agreed to cooperate with the government. His career as an accountant is likely over in any event; the SEC is not allowed to accept audits from convicted felons.
Friehling's sentencing has been set for September 3, 2010. It was postponed from February 2010 at the request of the prosecution, citing Friehling's "continuing cooperation with the Government". That was postponed until September 2010….that was then postponed until March 15, 2011….now that has been postponed until September 16, 2011.
Madoff investment scandal
The Madoff investment scandal broke in December 2008 when former NASDAQ chairman Bernard Madoff admitted that the wealth management arm of his business was an elaborate Ponzi scheme....
. He later plead guilty to these charges.
Early life
Friehling was born in Sullivan CountySullivan County, New York
Sullivan County is a county located in the U.S. state of New York. As of the 2010 census, the population was 77,547. The county seat is Monticello. The name is in honor of Major General John Sullivan, who was a hero in the American Revolutionary War...
, north of New York City, and attended high school in Liberty, New York
Liberty (village), New York
Liberty is a village in Sullivan County, New York, United States. The population was 3,975 at the 2000 census.The Village of Liberty is centrally located in the Town of Liberty and is adjacent to New York Route 17.- History :...
. His affluent family owned the Stevensville Hotel, a prominent Borscht Belt
Borscht Belt
Borscht Belt, or Jewish Alps, is a colloquial term for the mostly defunct summer resorts of the Catskill Mountains in parts of Sullivan, Orange and Ulster counties in upstate New York that were a popular vacation spot for New York City Jews from the 1920s through the 1960s.-Name:The name comes from...
resort in Swan Lake, New York. He is a 1981 graduate of Cornell University
Cornell University
Cornell University is an Ivy League university located in Ithaca, New York, United States. It is a private land-grant university, receiving annual funding from the State of New York for certain educational missions...
, and a past-president of the Rockland
Rockland
-Places:In Canada*Rockland, Greater Victoria*Rockland, Nova Scotia*Rockland, OntarioIn the United States*Rockland, California*Rockland, Delaware*Rockland, Idaho*Rockland, Maine*Rockland, Massachusetts*Rockland, New York*Rockland County, New York...
chapter of the NYS Society of CPA
Certified Public Accountant
Certified Public Accountant is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA...
s (NYSSCPA).
Friehling & Horowitz as Madoff's auditors
For many years, Bernard L. Madoff Investment Securities LLC books were audited by Friehling & Horowitz, a little-known accounting firm in New City, New YorkNew City, New York
New City is a hamlet , in the Town of Clarkstown Rockland County, New York, United States, part of the New York Metropolitan Area. The hamlet is a suburb of New York City, located 18 miles north of the city at the closest point, Riverdale, The Bronx...
; a small town north of New York City. The firm consisted of two principals—Friehling and Jerome Horowitz—and a secretary.
Horowitz met Madoff in 1963, when the Madoff organization was a penny stock
Penny stock
In the United States, penny stocks are common shares of small public companies that trade at less than $1.00. In some countries, similar shares of stock are known as cent stocks.-Concerns for investors:...
trader. He audited Madoff's books before retiring to Palm Beach Gardens, Florida
Palm Beach Gardens, Florida
Palm Beach Gardens is a city in Palm Beach County in the U.S. state of Florida. The city is in the center of a rapidly-developing area north of West Palm Beach in the northern part of the county and the South Florida metropolitan area. , the population was 48,452...
in 1991 and handing the account to his son-in-law, Friehling. Horowitz died on March 12, 2009 after a long battle with cancer; it is not known whether he was a target of the Madoff investigation.
Well before the Madoff scandal broke, several observers doubted that a tiny firm with only one active accountant could competently service a firm that had grown into a multi-billion-dollar operation. In 2007, Askia LLC, a hedge fund consultant, warned its clients to stay away from Madoff for that very reason; its CEO, Jim Vos, likened this situation to General Motors
General Motors
General Motors Company , commonly known as GM, formerly incorporated as General Motors Corporation, is an American multinational automotive corporation headquartered in Detroit, Michigan and the world's second-largest automaker in 2010...
being audited by a three-person firm. Others were suspicious that Madoff refused requests for due dilligence because his accountant—supposedly his brother-in-law—was the only one allowed to see the books.
Soon after the Madoff scandal broke, it emerged that Friehling & Horowitz had informed the American Institute of Certified Public Accountants
American Institute of Certified Public Accountants
Founded in 1887, the American Institute of Certified Public Accountants is the national professional organization of Certified Public Accountants in the United States, with more than 370,000 CPA members in 128 countries in business and industry, public practice, government, education, student...
in writing since 1993 that it didn't conduct audits. An investigation into Friehling by Rockland County district attorney
District attorney
In many jurisdictions in the United States, a District Attorney is an elected or appointed government official who represents the government in the prosecution of criminal offenses. The district attorney is the highest officeholder in the jurisdiction's legal department and supervises a staff of...
Thomas Zugibe was stopped in deferral to the investigation by the United States Attorney for the Southern District of New York.
Friehling was not registered with the Public Company Accounting Oversight Board
Public Company Accounting Oversight Board
The Public Company Accounting Oversight Board is a private-sector, non-profit corporation created by the Sarbanes–Oxley Act, a 2002 United States federal law, to oversee the auditors of public companies. Its stated purpose is to 'protect the interests of investors and further the public interest...
, which was created under the Sarbanes-Oxley Act
Sarbanes-Oxley Act
The Sarbanes–Oxley Act of 2002 , also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act' and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002, which...
of 2002 to help detect fraud. Nor was the firm "peer review
Peer review
Peer review is a process of self-regulation by a profession or a process of evaluation involving qualified individuals within the relevant field. Peer review methods are employed to maintain standards, improve performance and provide credibility...
ed," in which auditors check one another for quality control
Quality control
Quality control, or QC for short, is a process by which entities review the quality of all factors involved in production. This approach places an emphasis on three aspects:...
. According to the AICPA, Friehling was enrolled in their peer-review program, but was not required to participate because he supposedly didn't conduct audits. It later emerged that Madoff's banker, JPMorgan Chase, had known that Friehling wasn't registered with the PCAOB or subject to peer review as early as 2006.
Arrest and plea
Friehling was charged on March 18, 2009, with securities fraudSecurities fraud
Securities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws....
, aiding and abetting investment adviser fraud, and four counts of filing false audit reports with the Securities and Exchange Commission.
On July 10, 2009, Friehling waived indictment and pleaded not guilty to criminal charges. He agreed to proceed without having the evidence in the criminal case against him reviewed by a grand jury at a hearing before U.S. District Judge Alvin Hellerstein
Alvin Hellerstein
Alvin K. Hellerstein is a senior judge of the U.S. District Court for the Southern District of New York and has been involved in several high-profile cases....
in Manhattan.
On November 3, 2009 he pled guilty to the charges against him. He admitted to simply rubber-stamping Madoff's filings with the SEC. He also revealed that he continued to audit Madoff even though he had invested a substantial amount of money with him. Accountants aren't allowed to audit broker-dealers with whom they're investing. He agreed to forfeit $3.18 million in accounting fees and withdrawals from his account with Madoff. Friehling faces a maximum sentence of 108 years in prison, but unlike Madoff has agreed to cooperate with the government. His career as an accountant is likely over in any event; the SEC is not allowed to accept audits from convicted felons.
Friehling's sentencing has been set for September 3, 2010. It was postponed from February 2010 at the request of the prosecution, citing Friehling's "continuing cooperation with the Government". That was postponed until September 2010….that was then postponed until March 15, 2011….now that has been postponed until September 16, 2011.
SEC charges
The SEC brought civil charges against Friehling and his firm. Madoff's firm paid Friehling between $12,000 and $14,500 a month for his services between 2004 and 2007.See also
- Accounting scandalsAccounting scandalsAccounting scandals, or corporate accounting scandals, are political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations...
- Bernard MadoffBernard MadoffBernard Lawrence "Bernie" Madoff is a former American businessman, stockbroker, investment advisor, and financier. He is the former non-executive chairman of the NASDAQ stock market, and the admitted operator of a Ponzi scheme that is considered to be the largest financial fraud in U.S...
- Certified public accountantCertified Public AccountantCertified Public Accountant is the statutory title of qualified accountants in the United States who have passed the Uniform Certified Public Accountant Examination and have met additional state education and experience requirements for certification as a CPA...
- Corporate abuse
- Dot-com bubbleDot-com bubbleThe dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...
- Due diligenceDue diligence"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
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- Forensic AccountingForensic accountingForensic accounting is the specialty practice area of accountancy that describes engagements that result from actual or anticipated disputes or litigation. "Forensic" means "suitable for use in a court of law", and it is to that standard and potential outcome that forensic accountants generally...
- LicensureLicensureLicensure refers to the granting of a license, which gives a "permission to practice." Such licenses are usually issued in order to regulate some activity that is deemed to be dangerous or a threat to the person or the public or which involves a high level of specialized skill...
- Sarbanes-Oxley ActSarbanes-Oxley ActThe Sarbanes–Oxley Act of 2002 , also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act' and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002, which...
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