Case 1.12:Madoff Securities
Case 1.12:
Madoff Securities
Questions:
1. Research recent developments involving this case. Summarize these developments in a bullet format.
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 firm’s independent auditors has applied to those assets?
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?
4. Professional auditing standards discuss the three key “conditions” that are typically present when a financial fraud occurs and identify a lengthy list of “fraud risk factors.” Briefly explain the difference between a fraud “condition” and a “fraud risk factors,” and provide examples of each. What fraud conditions and fraud risk factors were apparently present in the Madoff case?
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.
Answers:
1. Recent developments involving the case Madoff Securities:
• Bernie Madoff’s son, Mark Madoff committed suicide on December 11, 2010. His suicide may have been influenced because there was an investigation on Mark’s children on grounds that Bernie transferred funds to their accounts.
• Peter Madoff pleaded guilty to his involvement in the Ponzi scheme run by his brother. Peter Madoff served as the chief compliance officer.
• Irving Picard, the trustee in charge of liquidating Madoff’s assets, has asked a New York court for approval to distribute an additional $1.5 billion to investors who lost money in Madoff’s fraudulent investments. It is estimated that Picard has already recovered $9.1 billion but has only been able to distribute $1.1 billion so far.
Madoff Securities
Questions:
1. Research recent developments involving this case. Summarize these developments in a bullet format.
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 firm’s independent auditors has applied to those assets?
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?
4. Professional auditing standards discuss the three key “conditions” that are typically present when a financial fraud occurs and identify a lengthy list of “fraud risk factors.” Briefly explain the difference between a fraud “condition” and a “fraud risk factors,” and provide examples of each. What fraud conditions and fraud risk factors were apparently present in the Madoff case?
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.
Answers:
1. Recent developments involving the case Madoff Securities:
• Bernie Madoff’s son, Mark Madoff committed suicide on December 11, 2010. His suicide may have been influenced because there was an investigation on Mark’s children on grounds that Bernie transferred funds to their accounts.
• Peter Madoff pleaded guilty to his involvement in the Ponzi scheme run by his brother. Peter Madoff served as the chief compliance officer.
• Irving Picard, the trustee in charge of liquidating Madoff’s assets, has asked a New York court for approval to distribute an additional $1.5 billion to investors who lost money in Madoff’s fraudulent investments. It is estimated that Picard has already recovered $9.1 billion but has only been able to distribute $1.1 billion so far.