SEC Charges Auditor with Securities Fraud for Allowing Client to Send Misleading Audit Reports To Investors
In its complaint against Madoff’s auditors, the SEC has charged the auditors with direct violations of the securities laws because the auditors knew that Madoff sent communications to clients that included the firm’s audit reports as well as statements indicating that audits were prepared by the firm in accordance with GAAP and that the auditor passed on the Madoff’s internal controls. The SEC alleges that the auditor knew (or recklessly disregarded) that Madoff used the audit reports in marketing and client service communications to clients. The SEC charges that the audit firm essentially failed to conduct any reasonable examination of Madoff’s activities. The SEC argues that the firm benefited from its fraudulent activity through the audit fees it received. The SEC also alleges violations of the independence rules and aiding and abetting various provisions of the securities laws.
OUR TAKE: Although this is obviously an extreme example of alleged auditor misconduct, audit firms (and other service providers) should significantly restrict the rights of clients to use their work product in client communications. Otherwise, they risk direct liability for securities fraud.