The story unfolding re: the SEC’s criminal complaint of securities fraud against the New York firm of Madoff Investment Securities LLC and its principal owner/operator Bernard L. Madoff has a big number being batted around. Madoff is quoted in the complaint estimating hidden losses of “at least” $50 billion but there is no basis for how that number was gotten to.

There is limited information being released by the SEC on their website as well as the wires. The slim facts refer to $17 billion of assets under management but that number is stale (January ’08). The $50 billion of “losses” mentioned refers to Madoff’s comment about cumulative losses from at least the last three years. The latest Form 13F discloses the firm’s stated holdings as of 9/30/08.

The drift of the story is that Madoff lost big and met liquidity requirements for investor redemptions and periodic returns with the money he was taking in from new investors. His statements to the SEC indicate there are negligible to no real assets remaining.

The discussions are silent re: the financials and an audit, other than to say Madoff closely guarded the financials (i.e. “kept them in a vault”). Madoff and one other family member are indicated as the named owners of the firm.

The audit piece is big and it’s missing in the story so far. With $17 billion or more of assets under management and the reports indicating these assets are spread over 11 to 23 high wealth individuals or hedge funds, the client contracts surely stipulated an annual audit.

With fraud of the size being indicated in the Madoff case, where no meaningful assets remain, it’s difficult to understand how even a fundamental audit would not uncover loose strings that led to the unraveling of the operation long before now. An alternative is that the audit report itself was faked or fraudulent (i.e. there is no auditor) and the client base saw no cause to verify that.

On the face of the early information coming out of this story, the core role of the audit in providing assurance to investors re: the accuracy & completeness of the financials takes center stage. Where is the audit and who performed it?