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Bernard Madoff was arrested in 2008 for operating the largest fraud in securities history on Wall Street. He pleaded guilty to federal charges including securities fraud, money laundering, and perjury. Investigators continued investigating Madoff's son after his death and are trying to recover funds from net winners of Madoff's scheme. Peer reviews of Madoff's firm Friehling & Horowitz may have identified the fraud, but some firms were able to influence peer review findings by choosing friendly reviewers, so it's not certain the fraud would have been discovered. Fraud conditions at Madoff's firm included motivation, opportunity, and ability to avoid detection over decades.
Bernard Madoff was arrested in 2008 for operating the largest fraud in securities history on Wall Street. He pleaded guilty to federal charges including securities fraud, money laundering, and perjury. Investigators continued investigating Madoff's son after his death and are trying to recover funds from net winners of Madoff's scheme. Peer reviews of Madoff's firm Friehling & Horowitz may have identified the fraud, but some firms were able to influence peer review findings by choosing friendly reviewers, so it's not certain the fraud would have been discovered. Fraud conditions at Madoff's firm included motivation, opportunity, and ability to avoid detection over decades.
Bernard Madoff was arrested in 2008 for operating the largest fraud in securities history on Wall Street. He pleaded guilty to federal charges including securities fraud, money laundering, and perjury. Investigators continued investigating Madoff's son after his death and are trying to recover funds from net winners of Madoff's scheme. Peer reviews of Madoff's firm Friehling & Horowitz may have identified the fraud, but some firms were able to influence peer review findings by choosing friendly reviewers, so it's not certain the fraud would have been discovered. Fraud conditions at Madoff's firm included motivation, opportunity, and ability to avoid detection over decades.
MADOFF SECURITIES 2 Madoff Securities Case Study 1. Research recent developments involving this case. Summarize these developments in a bullet form. On December 11, 2008 federal agents arrested Bernard Madoff. He was charged with the largest fraud in securities history on Wall Street. Madoff pleaded guilty to all the federal charges against him on March 12, 2009. These charges included counting securities fraud, money laundering and perjury. Before his scheme was uncovered he was regarded as on of the most valued financiers in Wall Street. Madoffs son committed suicide in 2010; however, his sons death did not cease the investigation that police had against him. After the death of Madoffs son the investigators stated that they would continue the investigation on his son to determine the role he may have played in his fathers ponzi scheme (Rothfeld, 2010). Those who were scammed by Bernard are trying to seize the net winners funds away from investors from any transactions they did with him (Rothfeld, 2010). The investors went away with more money than they initially invested. The Supreme Court dropped investors attorney appeals for those who received all the money they have invested with Madoff back before he was arrested. This cancellation of appeals took place in June of 2012. According to the courts all claims had to be based on the final statements that Madoff received in 2008 (Washington, 2012). MADOFF SECURITIES 3 In 2012 of June, Peter Madoff pleaded guilty to felony charges in a plea deal. He was the first relative of Madoff to admit that he had a part to play in the ponzi scheme (Washington, 2012).
2. Suppose that a large investment firm had approximately 10 percent of its total assets invested in funds managed by Madoff Securities. What audit procedures should the investment firms independent auditors has applied to those assets? The auditors needed to improve on how they understood the differences in securities in order to make sure that the y could perform a correct audit. Once that was completed they would be able to implement a suitable process for any financial statement related to those securities. Further, SAS No. 92 state that auditors must be skilled with certain capabilities to formulate any type of procedure related to auditing for differences, securities, and asset and risk management (Anonymous, 2000).
3. Describe the nature and purpose of a peer review. Would peer reviews of Friehling & Horowitz have likely resulted in the discovery of the Madoff fraud? Why or why not? The purpose of the peer review is to have ones auditing firm be inspected by another auditing firm to review the quality of standards as related to their auditing procedures. Anantharman (2007), confirm that the AICPAs Peer Review Program is the framework for self regulation in the accounting sector, where the reviewer must issue a statement of their opinion on the findings of the audit firm (p. 1). When firms are MADOFF SECURITIES 4 constantly peer reviewed by other firms in the eyes of the public they begin to receive a better rating from PCAOB reviews. In the case of the Madoff fraud if Friehling & Horowitz had been peer reviewed they may have been a chance that the fraud would have been identified; however, it not is not a 100 percent possible. Anantharman (2007) state not all peer reviews were objective because some firms were able to governor peer review findings by choosing friendly reviewers (p. 2). Every state must have a peer review program done by a separated auditing firm.
4. Explain the difference between a fraud condition and a fraud risk factor, and provide examples. What fraud conditions and fraud risk factors were apparently present in the Madoff case? Three key conditions are identified by the professional auditing standards that determine when fraud is taking place, further, risk factors will also be present. Instructions to independent auditors are offered in SAS No. 82 on how to determine and record risk factors related to possible fraud. This regulation also encourages auditors to provide categorizations of risk factors to determine when assessing risk and transfer of suspected fraud to the financial committee (Reinstein & Dery, 1999). One of the key fraud risks in Madoffs case was the rate of return. This rate was very high compared to other companies within the same sector. There were many accounting firms that tried to imitate his strategy but were unsuccessful. Fraud occurs when there is motivation, opportunity, and a way to justify the fraud without being detected. Madoff had all three and with these factors he was able to MADOFF SECURITIES 5 defraud many investors for decades. According to Gramling & Myer (2006), a time window must be open so that there can be an opportunity to complete a planned fraud (para. 2). 5. In addition to the reforms mentioned in this case, recommend other financial reporting and auditing- related reforms that would likely be effective in preventing or detecting frauds similar to that perpetrated by Madoff. Other financial reporting and auditing-related reforms that would be likely be effective in preventing or detecting frauds similar to Madoffs would include the SEC taking more care in handling the complaints that are garnered from observers as well as follow-up on information that are provided by whistleblowers. -Reward those that give pertinent information that contribute in stopping or preventing fraud. -Have big and medium sized independent auditing firms as third party peer reviewers. -SEC must hire competent auditors that will follow through and apply regulations to make sure companies are in line with SEC laws. -Mandate it that investors have access both on paper and online to see their accounts
MADOFF SECURITIES 6 References Anantharaman. (2007). How objective is peer review? (Doctoral dissertation, Columbia Business School) Retrieved from https://aaahq.org/audit/midyear/08midyear/papers/43_Anantharaman_HowObject ive.pdf Anonymous. (2000). Sas no. 92-auditing derivative instruments, hedging activities, and investments in securities. Journal of Accountancy, 190(5), 130-142. doi: 63329279 Gramling, A., & Myers, M. (2006). Internal auditors assessment of fraud implications for external auditors warning signs: Implications for external auditors. The CPA Journal, Retrieved from http://www.nysscpa.org/cpajournal/2003/0603/features/f061803.htm Knapp, M. C. (2013). Contemporary auditing: Real issues & cases (9th ed.). Mason, OH:
Guide: SOC 2 Reporting on an Examination of Controls at a Service Organization Relevant to Security, Availability, Processing Integrity, Confidentiality, or Privacy