Introduction
The case of Bernie Madoff is a good example of unethical practices can lead to corruption. Madoff, which is the former investment and a stock broker, is introduced around the globe as the only operator in the largest Ponzi scheme ever on record. This is because he turned its financial management firm into a huge Ponzi scheme that defrauded a lot of money from thousands of his investors. The paper will determine the regulatory oversight that was existing while the Ponzi scheme was operating. It also speculates on the main reasons why such plans were not discovered while investing in Madoff Securities, and how to expose the possible fraudulent activities. However, the SEC has the power to investigate the business activities of Madoff that managed billions of dollars for the rich people as well as the philanthropists. According to the statement of Markopolos, the staff lawyers that were working in SEC had inadequate experience in the financial sector, and lack of training to conduct investigations.
Question one
The regulatory oversight that was in place during the Ponzi scheme uses the money for the current investors to settle the old investors. According to the case study, the previous investors were told that their investments are earning about 12%, and it will be better to leave their money to make even more earnings. Moreover, the wealthy stockholders do not need to make a monthly check. It was not easy to discover the scheme in the sense that the Bernie Madoff Investment Securities are not able to talk rich regarding the old investors. Therefore, they used the funds of new investors to pay off the previous depositors. This is the clear concept of pyramid schemes. Similarly, the old investors are entitled to the high rate of returns especially when they cash out. Consequently, they will not complain even if they suspect a Ponzi scheme. When fraud is unnoticed for a long time, any regulator such as SEC should require more specialized staff and time to solve future cases like this one of Madoff. Lastly, a high return on the cash invested than in other places in the financial institutions or markets motivates greed in people.
Question two
It is the auditor to make a decision on how far he will go to verify the assets of the fund and trades. A company that plans to invest $10 million in Madoff Securities will act as a feeder fund into the Ponzi scheme. However, all firms that are operating feeder resources should have a recognized accounting firms that are listed as their auditors. For example, when an investor puts money in the selected market fund, the primary feeder of Madoff, the savings had been audited by one of the leading audit firm, KPMG. Like any other leading audit firms, KPMG only checked the financial statements that were provided by Madoff, and nothing more concerning the financial records. Therefore, the Friehling & Horowitz, a small accounting firm for Madoff outside New York was core to the above vortex. In the real sense, this should have been a red flag. But by considering the major players like KPMG and PricewaterhouseCoopers, they provided clean bills of health to several funds that were invested with Madoff as well as its asset management company.
Question three
The primary aim of independent auditors is to establish the accuracy of the presented accounts and to make actual confirmation on the existence of recorded assets (Rezaee &Riley, 2009). To attain this process, several audit tools should be applied such as the review of the audit procedures, analytical measurements that have been adopted, risk assessments, and decisions regarding the materiality of auditing. The above processes will identify the inherent and control risks that may lead to misstatements in the financial statements and accounting information. Therefore, for proper detection of risk, a careful audit of major transactions need to be undertaken to confirm the extent of accounting accuracy. Regarding materiality, an auditor should do further review to qualify the presented accounts so that the investment firm is not fooled by the investment advisor. The exercise will do away with the misstatements that overstate the financial position of any investment fund. Additionally, the procedures will also provide important evidence that will guide the financial decisions of the investment firm.
The fundamental audit process that was appropriate during the audits of Madoff was the confirmation of the stocks that had been bought for his customers. According to SEC, the Freihling & Horowitz did not conduct anything that remotely resembles an audit. Similarly, it did not confirm the existence of the stocks Madoff purportedly bought on behalf of the customers, a fundamental audit test. That is it is not the responsibility of the accountant for any capital management company to audit the underlying investments of the corporation that it invests because the auditor in such a scenario will not be able to test the existence of the underlying securities particularly in a fraud of cash situation (Mackintosh, 2008). Consequently, any auditing firm should exercise due diligence to assist in protecting the client and to ensure that there is proper auditing practice.
Question four
An independent evaluation of any professional entity work by a peer in the similar business is the peer review. It involves a comprehensive examination of the accounting work of the firm by another company that are not related to the entity subject to the audit. The process ensures that the standards of the business are maintained, making sure that the accounting standards are above the board and elimination of the conflicts of interest. A peer review would have detected the fraudulent practices in Madoff because several queries would have been raised regarding the capability of the firm to handle large accounts effectively provided that it had only one accountant. The fact that the accounting firm held many accounts with Madoff was enough to impute a conflict of interest and make a suggestion that the presented accounts would be tainted with numerous misstatements to show a rosy image.
Question five
Harry Markopolos had a significant role in the chase for the irregularities of Madoff Securities in different times. This was a great news at the time since it took a coverage on the financial markets. Markopolos raised over twenty red flags based on gossip, innuendo, and soft rhetoric information. These were easily dismissed by a lawyer with natural skepticism upon such evidence. However, it is not realistic to rely on constant growth wherein the market set-up is not similar. Therefore, SEC as the most influential institution has the power to restore trust among the investors through vigorous and independent investigation into the activities of Madoff and publish it to the investors. However, SEC did not do their duty. Therefore, they are responsible for the Madoff scam.
Question six
The head of Madoff Securities, Bernie was overall in the company. He avoided all the disciplines of the firm intentionally and decided to conduct the jobs at the different level of management. Moreover, the management team were coming from the same lineage as Madoff. Thus, there was the lack of internal control in the management. Hence, no accountability. Madoff Securities had Freihling & Horowitz as an external auditor that had a direct investment in the company. This was unique, exceptional, and unfortunate. In this case, the scope of audit conduct will be influenced as well as the audit report will questionable. Madoff also compromised the external auditors that acted as the only spokesman for the company on behalf of the stockholders. This is how he paved the way for pursuing whatever he wanted. Therefore, it is not fair to an external auditor conducting an audit work for the same firm for more than four years. This act will indefinitely influence the independence of an auditor.
In conclusion, the fraudulent investment schemes of Bernard Madoff served as the hallmark event especially in the historical books in the financial sector. The lesson to all investors is very simple and the one that all of them in equities should hold from day one is that they will lose cash at some times, and there is no such thing that the system of investment to believe otherwise, it is extremely unsophisticated. This case study of Madoff Securities is contrary to the way they are portrayed in the media coverage, were not sophisticated when it comes to the investment environment.
References
Mackintosh, J. (2008). Accounting firms drawn into Madoff scandal - FT.com. Financial Times. Retrieved 21 July 2016, from https://next.ft.com/content/e8294d3c-ccef-11dd-9905-000077b07658
Rezaee, Z. & Riley, R. (2009). Financial Statement Fraud: Prevention and Detection (2nd ed.). John Wiley & Sons.
