Rep. Paul Kanjorski, D-Pa., has introduced a bill in Congress to close a legal loophole that allowed Bernard Madoff’s tiny auditing firm to avoid scrutiny.

Kanjorski (pictured), who is chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises, introduced the bill, which gives the Public Company Accounting Oversight Board the full authority to inspect, examine and discipline auditors of all broker-dealers, not just public broker-dealers.

Under current law, the PCAOB is unable to inspect and examine the work of the auditors of most broker-dealers. However, as a result of a Securities and Exchange Commission decision late last year, the auditors of all broker-dealers must now register with the PCAOB.

The PCAOB recently published guidance on registering auditors of broker-dealers with the board, and the new requirements for broker-dealer financial statements being audited by PCAOB-registered firms (see PCAOB Starts Registering Broker-Dealer Auditors). The bill introduced by Kanjorski allows auditors of broker-dealers, such as Madoff’s three-person auditing firm, Friehling & Horowitz, to also be subject to disciplinary action by the PCAOB.

"If this legal loophole had not existed, Bernard Madoff's storefront auditing company would have had to register with the PCAOB,” said Kanjorski in a statement.  “Inspection and examination of Mr. Madoff’s accountant by the PCAOB could have identified his Ponzi scheme much earlier.”

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

The American Institute of CPAs issued a statement of support for the Kanjorski bill. “We share Rep. Kanjorski’s interest in strengthening investor protections,” said AICPA president and CEO Barry Melancon. “His legislation is a first step in Congress’s review of the need for wider regulation of broker-dealers and their affiliated investment advisors and managed funds.”

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