Legislation Would Prevent Future Broker-Dealer Fraud by Closing Loophole Exploited in $50 Billion Ponzi Scheme

WASHINGTON - Today, Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, introduced H.R. 1212 to close a legal loophole in the authority of the Public Company Accounting Oversight Board (PCAOB) that helped Bernard Madoff to avoid detection of his $50 billion scam.  Chairman Kanjorski's bill would ensure that the PCAOB has the full authority to inspect, examine, and discipline the auditors of all broker-dealers, not just public broker-dealers.

"If this legal loophole had not existed, Bernard Madoff's storefront auditing company would have had to register with the PCAOB.  Inspection and examination of Mr. Madoff's accountant by the PCAOB could have identified his Ponzi scheme much earlier," said Chairman Kanjorski.  "The purpose of the PCAOB is to protect the interests of investors, but under current law it is unable to inspect and examine the work of the auditors of most broker-dealers.  My legislation changes that.  It will better protect investors by ensuring that every auditor of every broker-dealer is properly regulated and appropriately disciplined when they break the rules."

As a result of a decision late last year by the Securities and Exchange Commission (SEC), the auditors of all broker-dealers must now register with the PCAOB.  Under current law, however, only the auditors of public broker-dealers are subject to disciplinary action by the PCAOB.  This loophole allowed Friehling and Horowitz, a small storefront auditing firm used by Bernard Madoff's company, to avoid registration with, inspection of, and enforcement by the PCAOB.  Inspection by the PCAOB of Friehling and Horowitz might have exposed Mr. Madoff's fraud earlier and limited its economic consequences for thousands of retirees, pension funds, university endowments, and charitable groups.

"My bill comes in response to a problem that we identified and examined at the first two hearings that I have held to examine the Madoff fraud, and I expect that it will have strong support going forward," added Chairman Kanjorski.  "In particular, I commend SEC Chairman Mary Schapiro for making this matter a priority.  I look forward to working with her on it as we move ahead with the consideration of this bill."

In a speech on February 6, Chairman Schapiro stated that one of her priorities at the SEC includes improving the quality of audits for non-public broker-dealers.  During a Financial Services Committee hearing on January 5, H. David Kotz, Inspector General of the SEC, also agreed that if PCAOB had the authority to oversee Mr. Madoff's auditor, it could have identified the fraud much earlier.  Mr. Kotz additionally said that the limited authority of the PCAOB needed to be addressed. 

"The era of deregulation is over, and this bill is only the first step that the Capital Markets Subcommittee will take in responding to the Madoff fraud," concluded Chairman Kanjorski.  "This sad episode provides us with a perfect case for examining the need for other regulatory reforms.  I am deeply committed to rebuilding our regulatory structure in a way that better protects investors and the public through stronger, common sense regulations.  Before we move ahead with considering these broader regulatory reforms, we must move quickly to close this narrow statutory loophole in the PCAOB's authority."

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