Conflict of Interest For Medifast Auditors?

UPDATE: On February 17, 2010, Medifast Inc. filed suit in US District Court, Southern District of California, alleging defamation, violation of California Corporations Code, and unfair business practices. On March 29, 2011, Judge Janis Sammartino dismissed all of Medifast’s claims against me in her ruling on my anti-SLAPP motion.

Last week Barry Minkow and Fraud Discovery Institute released a report regarding the independence of the auditors of Medifast Inc. (NYSE:MED). The company is audited by Bagell, Josephs, Levine & Company. The audit partner happens to also be a part of BJL Wealth Management, an investment firm with the same address as the audit firm.

This becomes interesting when you consider that BJL Wealth Mangement recommended the purchase of Medifast stock to an operative of FDI. Is this a conflict of interest? It may be. Does the audit partner, in his role at the investment firm, make recommendations regarding Medifast stock? Does he have any financial interest in transactions invovling Medifast stock? If the answer to either of these questions is yes, then the audit partner would have compromised his independence.

An auditor working in the capacity of an investment advisor does not automatically give rise to independence issues. In fact, over the last ten years, the accounting powers that be were recommending that CPAs get involved in selling investments to generate additional revenue in their practices. However, when conducting an audit, the CPA has to draw a very clear line and not make recommendations regarding the buying or selling of securities of an audit client. The CPA also must not have any financial interest in the buying or selling of that stock. (i.e. He can’t receive any income from the sale of securities of an audit client, even if it was someone else in the investment firm making the sale or recommendation.)

Another interesting factoid uncovered by FDI … The PCAOB inspected six audits done by Bagell, Josephs, Levine, and found signficant audit deficiencies in HALF of them. That’s a pretty bad hit rate.

Interesting links:

FDI’s website detailing its investigation of Medifast – http://www.medifraud.net
Sam Antar suggests Medifast should change auditors – http://whitecollarfraud.blogspot.com/2009/06/compelling-reasons-for-medifast-to.html
Bagell, Josephs & Levine & Company – http://bagelljosephs.com/abt_partners.html
BJL Wealth Management – http://bjlwealth.com/new/bjlwealth/gate.asp