“Independent” accounting firms have played a central role in several high-profile investment frauds. Just last week the SEC filed charges against an investment adviser, alleging that the “independent” accounting firm was a complete phony.
On March 15, 2012, the SEC filed a complaint against San Francisco investment adviser James Murray of Market Neutral Trading LLC for bilking investors out of nearly $5 million.
The SEC charged Murray with providing phony audit reports to investors from the “independent” auditor Jones, Moore & Associates. It turns out that Jones, Moore & Associates was not a legitimate accounting firm “but rather a shell company that Murray secretly created and controlled.”
Murray even went to the extent of creating an elaborate website for Jones, Moore & Associates, posting press releases and listing staff members, including principals Joseph Moore and Richard Jones. The SEC says that Joseph Moore, Richard Jones and at least three other people on the staff directory don’t even exist.
Why go through all this? “An independent financial audit is one of the best protections available to investors,” said Marc Fagel of the SEC.
Accounting firms have played a central role in several other high-profile investment frauds. Bernie Madoff used an unusually small two-person accounting firm to manage his billion-dollar hedge fund, while Sam Israel used an accounting firm run by his CFO.
Here are some tips to avoid bogus accounting firms and investment fraud:
- Independently verify the relationship between the investment adviser and the accounting firm. And by “independently verify the relationship,” we don’t mean just make sure the firm has a nice website. Call the firm, talk to someone and ask questions. Many of the accounting firms will provide letters confirming the relationship while others will verbally verify the relationship.
- Check the state accounting board to determine if the firm is registered as a legitimate accounting firm (Jones, Moore & Associates was not) and/or to see if it has had any disciplinary actions filed against it.
- Review media and/or civil litigation to determine if the firm has been the subject of any derogatory media (or any media at all) or had any litigation filed against it by clients.
- Check the secretary of state’s website to see if the company is incorporated and in good standing and to verify the identities of the principals (Israel’s accounting firm was run by the CFO of his own fund).