Stanford Auditing Case

Allen Stanford was, at one point, a successful entrepreneur whose investment company’s accounts totaled in the billions. The aforementioned keyword is ‘was.’ As CEO of Stanford Financial Group, Stanford essentially ran a massive Ponzi scheme; he issued certificates of deposit at an offshore bank that he controlled and illegally used the investors’ funds. These CD’s were appealing to investors due to their high returns of nearly twice the average rate of return of investments in U.S. banks. Investors were led to believe that these CD’s had such high returns because they were being invested in corporate stocks, real estate, hedge funds, and precious metals (BusinessWeek). The SEC eventually uncovered Stanford’s fraud in 2008. Stanford was recently convicted and sentenced to 110 years (NYTimes). In an attempt to recover some of the money from the corrupt management of the investments, the investors’ next step was to sue the auditors of Stanford Financial Group. BDO, the accounting firm that was responsible for auditing Stanford’s financial statements, is currently the target of a major lawsuit. BDO did not act in accordance with the responsibilities of an auditor and thus led to audit risk, lack of independence, and various violations of the PCAOB’s auditing standards regarding investment securities.
BDO consistently issued unqualified reports when there were material misstatements. This was an instance of audit risk. Audit risk is the risk that an auditor will conclude that financial statements are fairly presented and issue an unqualified opinion when, in fact, there are material misstatements. The class-action lawsuit filed against BDO accused the auditors of audit failure, which is slightly different than audit risk. Audit failure is when the auditors do not comply with audit standards and issue an incorrect opinion. BDO consistently issued unqualified reports when there was fraud (AccountingToday). Although BDO did not directly audit Stanford Financial Group’s