More on the Madoff mess from the Hill: A House lawmaker blasted Securities and Exchange Commission for missing red flags in a 2007 audit report of Bernard L. Madoff Investment Securities and called on its chairman to provide information on its policies and procedures in light of questions raised by the report.

As part of Congress’s examination into the alleged $50 billion fraud committed by money manager Bernard Madoff, Pennsylvania Democrat Paul Kanjorski, Chairman of a House Capital Markets Sub-committee, sent a letter Jan. 15 to SEC chairman Christopher Cox seeking answers to questions about its current polices and procedures that Kanjorski said will be used in drafting new laws to govern the securities markets.

The letter says the report “appears to offer several red flags that could have helped the Commission to find this sizable investor problem earlier.”

Among other things, the letter seeks responses from Cox by Jan. 28 on whether the known signing of an annual audited report of a broker-dealer containing false information could lead to sanctions under securities laws and, if so, what types.

“It seems highly probable that this annual financial statement and prior submissions are most likely inaccurate, especially given press reports that Mr. Madoff maintained a separate set of books,” Kanjorski wrote. Because Madoff signed the document, he may be subject to additional violations of federal securities laws and regulations.

Kanjorski also noted that the form appears to “fall short” of Commission’s filing requirements because additional required material isn’t attached. “A cursory review of these documents by the Commission’s staff would have likely detected these discrepancies,” he wrote.

Among other things, Kanjorski asked whether the SEC staff reviews each annual audited report of a broker-dealer as it comes in, the general procedures used to do so, as well as any alternative review procedures and the reasons the Commission implemented them.

He also requested information on the Commission’s compliance and inspection policies and regulations related to internal controls for broker-dealers and their auditors, along with reasons the SEC didn’t extend an exemption from registration with the Public Company Accounting Oversight Board for the auditors of broker-dealers, which expired at the end of 2008, shortly after it became widely known that BMIS used an auditor that wasn’t registered with the PCAOB.

Kanjorski said he is already working on legislation to provide the PCAOB statutory authority to inspect and take enforcement actions against the registered auditors of non-public broker-dealers. “I would appreciate receiving the Commission’s thoughts on the need for and suggested content of such legislation,” he wrote. “I would also like an explanation as to why the Commission has not publicly called on Congress to take this action.”

Noting that the audit report indicates that a computation of net capital for BMIS should be attached, but none appears in the submission, Kanjorski requested details about why and when the SEC allows for the use of alternative methods for computing the net capital requirements of broker-dealers and how it ensures that broker-dealers have properly calculated their capital requirements.

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