- Published: September 4, 2022
- Updated: September 4, 2022
- Language: English
- Downloads: 50
In the case of Bernie Madoff this is perfect example of how unethical behavior can turn into corruption. Madoff, a former investment and stock broker, was formally introduced to the world as the ‘sole’ operator in the largest Ponzi scheme on record. Madoff turned his financial management company into a colossal Ponzi scheme that swindled billions, from thousands of his investors. In this paper we determine the regulatory oversight that was in place while the Ponzi scheme was operating, and speculate on the main reasons why they did not discover the scheme, we’ll look at investing in Madoff Securities and how to expose the potential fraud.
Determine the regulatory oversight that was in place while the Ponzi scheme was operating, and speculate on the main reasons why they did not discover the scheme. The regulatory oversight that was very concept of a Ponzi scheme uses new investor money to pay old investors. Here is how it can work according to text old investor is reminded that his investment is earning 12%, but wouldn’t it be better to leave it there to earn even more. The wealthy investor doesn’t need a monthly check so he may take the advice to ‘let it ride’.
But if he hears rumors about Bernard Madoff Investment Securities, he (meaning rich investor) may decide to take all of his money out. If Bernard Madoff Investment Securities (BMIS) cannot talk rich old investor out of it, Bernard Madoff Investment Securities will use new investor funds to pay off the old investor. That is the concept of a pyramid. The old investor gets his high rate of return when he cashes out, and he is happy, but somewhat quiet about deserting the ship. Even if the old investor suspects a Ponzi scheme, he will say nothing. A high return on funds invested, and particularly higher than other places in the financial markets incites greed in people.
Assume you are an auditor for a firm that had $10 million dollars invested in Madoff Securities. Assume I was an auditor for a firm that had $10 million dollars invested in Bernard Madoff Investment Securities, BMIS is the broker-dealer a start-up or privately held firm, compliance history of the broker-dealer. Second, I would want visibility of the trading online so that I could see what was bought and sold. Bernard Madoff Investment Securities would wait until the end of the quarter and the manufacture the gains he wanted by claiming that he bought and sold certain shares. If Bernard Madoff Investment Securities couldn’t show anyone during the quarter because BMIS hadn’t figure out what he was going to retroactively claim to have bought and sold.
Third, I would want to know that the auditor was registered with the AICPA (BMIS was not) and that he was an expert in securities. Four, ask for references from others who are already with the firm is also wise, but keep in mind they most likely will not give you an unhappy representative as a reference. The best way to judge is to research the growth and lost rate of producers over the past several years. If more advisors are joining and few are leaving, then it may be one to consider. Determine the fundamental audit procedures that you should have applied investment.
The fundamental audit procedures that applied to this investment takes place in between the date that the financial statements state, and the date of the auditor’s report. Lapse of time is considered the time period for a subsequent event. The auditors have responsibility for those events. The financial statements show that the company is profitable and in good health. The auditor’s report states that no material misstatements are present. The investors, creditors, and other users of the financial statements (and auditor’s report) will rely on this information.
The lawsuit is for billions of dollars and if the group is successful, the amount of the potential judgment would literally run the company out of business. In this Case the company was be forced to shut down. The independent firm of auditor gains knowledge of this event. The auditor has a legal obligation, due to the material nature of the event, to take responsibility in reporting the event appropriately, so that the users of the financial statements are aware of this event. Predict the way in which a peer review of Friehling and Horowitz would have uncovered the scheme related to Madoff Securities.
First the right fundamental audit procedures were in place BMIS was audited by a small accounting firm called Friehling and Horowitz but according to the SEC alleges that Friehling merely pretended to conduct minimal audit procedures of certain accounts to make it seem like he was conducting an audit, and then failed to document his purported findings and conclusions as required under GAAS. According to the SEC’s complaint, Friehling similarly did not conduct any audit procedures with respect to BMIS internal controls, and had no basis to represent that BMIS had no material inadequacies but audit is an important part of the control process.
Friehling was afraid that his work for BMIS would be subject to peer review, as required of accountants who conduct audits, Friehling lied to the American Institute of Certified Public Accountants for years and denied that he conducted any audit work. Pretend you are Harry Markopolos and suggest one (1) strategy, different from that of the case study, to expose the potential fraud. Provide a rationale to support the suggestion.
The fraud could have been avoided had the necessary rules and regulations been more strictly reinforced by regulators. The Securities Exchange Commission, only to a very small extent, played their part in protecting the interest of investors as deeper investigations should have been done into BMIS with so many hole or problems. If I was Harry Markopolos the suggest one strategy would have hired more audit and had investors taken the time to find out more about this man, who claimed to be able to offer such extraordinary returns then it’s quite possible many of them would not have lost so much money. Analyze the role of the audit committee for Madoff Securities in regard to the discovery of Ponzi scheme, and suggest one (1) action the audit committee could have taken in order to prevent or detect the fraud. Provide a rationale to support the suggestion.
Analyze the role of the audit committee for Madoff Securities in regard to the discovery of Ponzi scheme and even after, it was on several occasions that Markopoulos submitted evidence to SEC offices. It was in May 1999, that the most tenacious Madoff opponent Harry Markopoulos started a campaign to persuade the SEC’s Boston office that Madoff’s returns could not be legitimate. The firm’s partners that Harry Markopoulos work for asked Markopoulos to reverse engineer the strategy so that they could offer that said successful product to their firm’s customers.
After he modeled the strategy, he determined that the returns could only be coming from illegal front running of the Madoff broker dealer arm’s client orders or from fictional returns that were the result of a Ponzi scheme, first lack of segregation amongst service providers, obscure auditors small accounting firm Fehling, heavy family influence and conflict of interest heavy, no Madoff mention and extreme secrecy and the big lack of staff. As far as in the future to stop like Madoff, Ethisphere has ranked major companies on their ethical standards for the past three years, and according to the research there is a marked correlation amid companies with a strong commitment to ethics and transparency, and strong financial results (Ethisphere, 2010), maybe something like this would ensure Ponzi schemes never happen again.
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EduFrogs. (2022) 'Madoff securities'. 4 September.
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