Introduction
R. Allen Stanford, through the Stanford Financial Group, was involved in a financial scam in which investors lost an estimated $ 7.2 billion. This was through a massive ponzi scheme in which the Stanford financial Group offered investors a return on their investments which was higher than market rates. The investors were misled into believing that their investments were made conservatively.
Fraud was committed through the issue of certificates of deposit to investors through the Antiguan bank which was a subsidiary of the Stanford Financial Group. These certificates of deposit sold to investors were later discovered to be bogus.
Claims against Stanford’s auditors
Stanford’s auditors, BDO USA LLP and its parent have been accused by investors of ignoring signs of potential fraud in Stanford Financial Group. The auditors, on repeated occasions issued unqualified audit opinions on the annual financial statements of the group. These opinions were relied upon by the investors in making decisions relating to their investment in the company. The investors claim that the investments they made based on the audit reports eventually led to the loss of their investments.
The unqualified audit opinions by the auditors were also necessary to satisfy some of the requirements of securities regulators. The opinions were also crucial to the company as support for their continued recommendation for the fraudulent sales bogus certificates of deposit at one of the group’s subsidiaries in Antigua.
BDO USA LLC is also accused of conflict of interest in the handling of its business with the Stanford Financial Group. Four executives of the audit company were involved in the overhauling of the Antiguan banking regulations, an activity which was sponsored by Stanford. It is alleged that this overhaul resulted in the weakening of systems to the benefit of Stanford. Specifically, the task force rewrote money laundering act of Antigua and ensured that fraud and false accounting was not among the listed violations under the act.
Issues in verifying the balances on client's financial statements
In verification of the balances on the client’s financial statements auditors would be mainly rely on the physical evidence presented to them. This would be in the form of the physical certificates of deposit that were issued to them by the Stanford Financial Group. This would be the principal method of verification of the balances.
According to AU 332, generally accepted accounting principles require that debt securities such as those offered by Stanford be reported at depending on management’s intent and ability to hold them to maturity. The cost of these debt securities would be an issue to be dealt with since they have already been identified as bogus and their maturity date is past due. The auditor will need to bear this in mind when making verifications of the value of debt securities on the client’s financial statements.
The valuation of securities can also be significantly lowered under several conditions (AU 332). One of these conditions is if the financial condition of the issuer has deteriorated. In the case of securities issued by the Stanford Financial group, it may be difficult to merely lower the value of the securities since the issuer has been determined to have issued them fraudulently and they may actually have no value. The auditor will have to evaluate the valuation of the securities in financial statements against a backdrop of these factors.
Recommendations to clients seeking to invest in off-shore banks
Clients seeking to invest in offshore banks should conduct diligent reviews of their position before committing their money for investment. They should evaluate the legal and regulatory framework under which the offshore bank operates and satisfy themselves that there are no loopholes that lead to loss of their investment.
Clients should also ensure that they determine without doubt the validity of the investment instruments that they invest in. This can be done through researching through regulatory bodies to ensue the legality and validity of the instruments.
An overreliance on the audit reports from the banks should be avoided. This, as demonstrated by the Stanford case, can lead to loss of investment. I would recommend that clients conduct their own independent checks to confirm the validity of the figure that banks present in their financial statements.
References
AU Section 332. Auditing Derivative Instruments, Hedging Activities, and Investments in Securities retrieved from http://pcaobus.org/standards/auditing/pages/au332.aspx#ps-pcaob_7af773c7-1464-4f5d-a8aa-5c7280c9e698
Driver, A. (February 27, 2009). U.S. charges Stanford with massive Ponzi scheme. Reuters. Thomson Reuters. Archived from the original on March 01 2009. Retrieved March 14 2013.
Calkins, L.B. ( 2011, May 27). Stanford Investors Sue Former Auditor BDO US for $10.7 Billion over Fraud. Bloomberg. Retrieved from http://www.bloomberg.com/news/2011-05-26/stanford-investors-sue-former-auditor-for-10-7-billion-1-.html
Patel, P. (2012, February 8). In Stanford trial, IRS agent tells of big deposits. The Houston Chronicle. Retrieved from www.chron.com/business/article/In-Stanford-trial-IRS-agent-tells-of-big-deposits-3147144.php
Langford, T. (2012, February 9). Regulator recalls Stanford’s Job offer. The Houston Chronicle. Retrieved from http://www.chron.com/business/article/Regulator-recalls-Stanford-s-job-offer-3201594.php
