Legal News

Morning Madoff Roundup: Holding the Accountants Accountable?

By Ashby Jones

Ah, what mornings in America have become in these dire times: a hot cup of Starbucks’ instant coffee, jitters over how the stock market will open, and news of Bernie Madoff.

Let’s bring you today’s dose of the latter.

The accountable accountants? Will auditing and accounting firms get left holding the bag in L’Affaire Madoff? A story in today’s WSJ by Ianthe Jeanne Dugan says maybe: “Numerous accounting firms missed the alleged fraud . . . as they inspected the investment company’s books or those of so-called feeder funds that helped steer money to it. As a result, those accountants could now be legally vulnerable to claims that they should have uncovered red flags, according to legal and accounting experts.”

For example, writes Dugan, Madoff’s firm was audited by Friehling & Horowitz, a suburban New York firm with only one active accountant. A lawyer for Friehling declined to comment.

Others have also come under fire. Madoff feeder fund Maxam Absolute Return Fund LP claims in a lawsuit filed in Connecticut Superior Court against its own auditor, McGladrey & Pullen LLP, that the firm was “in the best position to understand that an operation of Madoff’s size required a much larger audit team.” A McGladrey spokeswoman declined to comment. KPMG and PricewaterhouseCoopers have also been named in suits. Each has denied wrongdoing.

In response, some auditors say they had no obligation to check out Madoff’s books. They contend their primary role is to make sure that the numbers their clients supply add up, not to detect fraud.

Making Hay out of a Loss: In a separate Journal article today, Jane Kim and Tom Herman examine the tax implications for Madoff victims. The bottom line, in the words of Leslie Samuels, a former assistant Treasury secretary for tax policy and now a lawyer at the Cleary Gottlieb in New York: “This is a mess. Nobody knows yet what all the facts are.”

Several lawyers say many of those who invested with Madoff may be able to deduct their losses as ordinary “theft losses,” which could be used to offset other income. But it’s unclear whether the IRS will agree on this or other issues, such as what investors should do about recouping taxes they paid in prior years on income they thought they had received at the time but now appears to have been illusory.

Full post as published by Law Blog - WSJ.com on February 18, 2009 (boomark / email).