Running Head: MADOFF SECURITIES 1

Madoff Securities Case Study

Shareen Lang
ACCT 622
May 16, 2014







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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).
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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
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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
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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






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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: