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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 have 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 factor,” 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.
On March 12, 2009, Bernie Madoff appeared before
Judge Denny Chin in a federal courthouse in New York City. After Judge Chin read the 11 counts of fraud, money laundering, perjury and theft pending against Madoff, he asked the welldressed defendant how he pled. “Guilty,” was
Madoff’s barely audible one-word reply. Judge
Chin then told Madoff to explain what he had done. “Your honor, for many years up until my arrest on December 11, 2008, I operated a Ponzi scheme through the investment advisory side of my business.”24 Madoff then added, “I knew what I did was wrong, indeed criminal. When
I began the Ponzi scheme, I believed it would end shortly and I would be able to extricate myself and my clients . . . [but] as the years went by I realized this day, and my arrest, would inevitably come.”25 Despite allegations that
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 have 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 factor,” 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.
On March 12, 2009, Bernie Madoff appeared before
Judge Denny Chin in a federal courthouse in New York City. After Judge Chin read the 11 counts of fraud, money laundering, perjury and theft pending against Madoff, he asked the welldressed defendant how he pled. “Guilty,” was
Madoff’s barely audible one-word reply. Judge
Chin then told Madoff to explain what he had done. “Your honor, for many years up until my arrest on December 11, 2008, I operated a Ponzi scheme through the investment advisory side of my business.”24 Madoff then added, “I knew what I did was wrong, indeed criminal. When
I began the Ponzi scheme, I believed it would end shortly and I would be able to extricate myself and my clients . . . [but] as the years went by I realized this day, and my arrest, would inevitably come.”25 Despite allegations that