Determining if Cheshire could get Madoff-ed

Bogus auditors are a problem in America. I first came to realize this as a result of this guy's criminal behavior. More precisely, Bloomberg News' David Scheer and Ian Katz reported on March 19:

The arrest of Bernard Madoff’s accountant highlights the peril posed by bogus auditors at the heart of Ponzi schemes that have bilked investors out of billions of dollars...

“Too many Larry, Moe & Curly accounting firms” are now auditing money managers, said James Cox, a law professor at Duke University in Durham, North Carolina. “While we made progress with accounting for reporting companies, we have not with investment advisers.”

The Securities and Exchange Commission is working on a proposal, first disclosed last year, that may force hedge funds to identify their auditors and brokers, said Robert Plaze an associate director in its investment management division. U.S. Representative Paul Kanjorski, a Pennsylvania Democrat, introduced legislation last month to let the PCAOB inspect and discipline the auditors of brokerages like Madoff’s. The measure would fix a “loophole” that lets auditors avoid PCAOB supervision, he said.

And therein lies the heart of my concern. I want to know if Cheshire's pension plan could get Madoff'ed.

While I know the Town's auditors (McGladrey) are a well-established, reputable firm... I also know that when it comes to the Town employees' pension plan, McGladrey doesn't audit it. Instead, there is a certain degree of reliance placed on other auditors. In other words:

1) the Town's pension plan has about $40 million in assets;
2) the assets are invested by about ten different investors; and
3) those investors are audited, but not by the Town's CPAs.

So I wanted to determine if these other auditors were real.

As such, I first called our auditors for some degree of comfort and have asked Town staff to speak with them on this. I mentioned this at the April 14 Council meeting:



In the meantime, I obtained the names of the auditors of the three hedge funds investing pension assets. Then I googled them and found:

1) Ernst & Young - These guys are a brand name. They're real auditors and don't have "virtual offices," as described in the Bloomberg article.

2) Anchin, Block & Anchin - A website means little. But I googled them and found them mentioned by the NYTimes 20 years ago, so at least they're not a fly-by-night... even though I didn't recognize the name.

3) Rothstein & Kass - Again, a website means little. But I also found this firm on the NYTimes online. In this case, the first hit was from 1992. So they've also been around a while.

And while all of that was valuable information to me - and gave me comfort with respect to the firms being reputable - reviewing the audits led to a different question. I'll address that in a separate post, probably this week.

Tim White