Top accounting firms were hoodwinked by Bernard Madoff's alleged $50bn fraud as well as several leading banks and some of the world's biggest hedge fund investors, according to lists of service providers to Madoff-linked funds.

PwC, KPMG and Ernst & Young, three of the "big four" accountants, and an arm of BDO International, the fifth largest, were all auditors of the feeder funds which channelled money into accounts at Mr Madoff's New York brokerage.

Mr Madoff, who has been charged with fraud and electronically tagged, told investigators his business was "one big lie", according to prosecutors. The head of the US brokerage industry's compensation scheme said records at Bernard L Madoff Investment Securities were "certainly falsified".

Several investors have said they took comfort from the presence of big, recognised accountants as auditors of the feeder funds, as well as from the registration of Madoff Securities with the Securities and Exchange Commission, the US market regulator. The SEC is now reviewing its own failure to investigate warnings alleging "financial wrongdoing" by Madoff.

The New York Law School became the first Madoff victim to target an accountant this week when it named BDO Seidman in a lawsuit alongside Ezra Merkin and his Ascot Partners fund, which invested almost all its money with Madoff and was audited by BDO.

Auditors of funds typically confirm with custodians that assets exist as stated, but Mr Madoff insisted clients make Madoff Securities custodian for assets, according to several people familiar with his terms.

Other banks listed by feeder funds as custodian - including HSBC, which acted for several, and Bank of New York - appear to have been responsible only for moving assets between jurisdictions.

According to fund documents seen by the Financial Times, PwC was auditor of Fairfield Sentry, the $7.3bn feeder fund run by New York-based Fairfield Greenwich; of Kingate Global, a $2.75bn feeder fund run by London's FIM Advisors; and of Gibraltar-based Reliance Management's $488m Defender fund.

KPMG audited two of Tremont Group's Rye Select funds, which had $2.37bn invested with Mr Madoff. Other Tremont funds also invested with Mr Madoff, giving clients of the Rye, New York-based manager a total exposure of $3.3bn, according to people familiar with the situation.

Ernst & Young audited at least four funds, two with $2.5bn from Herald Asset Management, linked to Vienna's Bank Medici - part-owned by Unicredit of Italy - and two with $870m from Pioneer Alternative Investments, a Unicredit subsidiary.

Fairfield itself is now considering suing PwC, according to one person familiar with the situation, while lawyers say they are building cases against anyone with "deep pockets" - including the auditors but also the managers of the feeder funds.

Pomerantz, a New York law firm, said it was building a case on behalf of clients, and it was "increasingly apparent that investors who invested with Madoff indirectly through one of his related 'feeder funds' may have a basis for legal redress, against those funds and their auditors".

Many of the other big US lawyers have also been instructed by victims to put together cases and find deep-pocketed companies to sue.

However, auditors say they are entitled to take on trust the word of custodians of assets.

Cindy Fornelli, executive director of the Center for Audit Quality, the US audit lobbyist, said fund accountants were responsible for ensuring money was "disbursed to the firms it invested in."

"It is not the auditor's responsibility to audit the underlying investments of the firms the capital management firm invests in. As an example, if the firm you're auditing invests in AT&T, you're not responsible for auditing AT&T.

"Rather, the existence of the underlying securities is verified with a third party, which in this case was a respected and SEC-registered investment adviser who was a former head of Nasdaq.

"In our view, the Madoff matter demonstrates why more light is needed in areas not currently regulated in our capital markets."

BDO Seidman pointed out it did not audit Madoff Securities. It said its "audits of Ascot Partners conformed to all professional standards and we will vigorously defend ourselves against these unfounded allegations".

PwC and Ernst & Young declined to comment. KPMG said: "Our work conformed to all professional standards."

Mr Madoff's business itself was audited by a tiny operation in Rockland County, New York, with only three employees, making it an unlikely source of billions of dollars in compensation.

Several potential investors in the feeder funds said the size of the auditor had raised a "red flag" and contributed to their decision not to invest.

Jim Vos, chief executive of Aksia, a hedge fund consultancy, said the feeder funds put "substantially all" their assets in the custody of Madoff Securities. "This necessitated Aksia checking the auditor of Madoff Securities, Friehling & Horowitz (not a fictitious audit firm)," he wrote in a letter to clients last week.

"After some investigating, we concluded that Friehling & Horowitz had three employees, of which one was 78 years old and living in Florida, one was a secretary, and one was an active 47 year old accountant… This operation appeared small given the scale and scope of Madoff's activities."