Editor’s Note: Francine McKenna is the founder and Managing Editor of Re: The Auditors. She has more than 20 years experience in leadership positions in the Big 4 and in the professional services and consulting industry both in the U.S. and abroad. You can see all of her posts for GC here and can follow her on Twitter @retheauditors.
Sex. Drugs. They didn’t mention rock and roll but I’m sure those stories will come out too eventually. Bernie and Elton John. Bernie and Mick Jagger. Bernie and Pink.
Never mind.
Scratch Elton John.
If it weren’t bad enough to have so many subprime lawsuits hanging over their head, the Big 4 – well everyone but Deloitte for some very odd reason – also have humongous Madoff lawsuits looming.

KPMG was named yesterday in a suit for their audit of Bernie’s London operation. This is no “feeder fund” suit but more like a bottom feeder suit, with lots of nasty allegations and everything but the kitchen sink thrown in for kicks. Actually, plaintiff’s lawyers I know say it’s perhaps “too much” and may be sanctionable.
But I’m not sure why a suit against KPMG as the Madoff London operation auditor took so long. Maybe the attorneys were biding their sweet time reviewing all video and listening to the sexy chats. The dirt that’s been dished in the most recent case brings to mind a sort of London party scene I can only imagine.

…Madoff should feel comfortable among the former drug dealers given his long association with office messengers who provided him and his wife Ruth with large amounts of marijuana over the years, according to accounts by former employee in a new book by ABC’s Brian Ross, “The Madoff Chronicles.” As the former Madoff staffers told Ross, Bernie liked to let off steam.

KPMG’s London office figures prominently in this new lawsuit along with some dirty bankers. Although I’ve read all the Madoff suits naming auditors, this one has the makings of a scandal du jour. (In July I counted 43 Madoff suits naming auditors for the SecuritiesDocket.com Mid Year Review webcast. This new one makes 44, about half of the total filed.)
And even though sordid stuff had been alluded to prior, it was never so direct and never so connected to the audit firms as now. There’s mention of one of a KPMG Director potentially being in Madoff’s back pocket, literally and figuratively.

The lawsuit also brings new accusations against KPMG, a prestigious “Big 4″ accounting firm, responsible for so-called independent audits of a several of the largest of Madoff’s U.S. “feeder funds,” as well as Madoff’s London office.
The lawsuit alleges there is “substantial evidence that KPMG either knew or failed to disclose or failed to detect” the massive Ponzi scheme.
And in particular, the suit questions the role of David Yim, a director in KPMG’s London office, whose cell phone number was found in Madoff’s personal address book and who was one of the auditors assigned to Madoff’s London operation, according to the lawsuit.

Up until now, the Big 4 was brushing off the Madoff suits, at least in public. In spite of PwC being named in 7 suits in Canada worth more than $2 billion, that story was not reported in any US mainstream media publications. The suits against the firms related to the feeder funds are perceived to be a stretch.
Jane Bryant Quinn in Bloomberg:

The question for investors is, are the auditors legally liable for their mistake?
As a general rule, auditors don’t dig deeply into partnerships that farm out money for others to invest. They look only at the top layer — that is, the partnership itself. Madoff sent audited reports to Ascot and the other feeder funds, which incorporated them into the statements sent to investors. The funds’ own auditors checked that the numbers added up. Period. End of story. To underline the limits of those responsibilities, BDO’s March 17, 2008, audit of Ascot said that it expresses no opinion on the “effectiveness of the partnership’s internal control over financial reporting.” I’ll say.

So, now we’re talking about a direct relationship between the auditors and Madoff.
Is KPMG going to claim their auditors were drugged versus duped?