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Submitted in partial fulfillment

of the requirements for the degree of
Bachelor of Science in Accountancy
University of the East, Manila

Submitted by:
Anika Mae Borcena
Coleen Mae Parayno
Jes-marie Dabela
Kathlenne Jaring
Maria Proserfina Caagbay

Submitted to:
Professor Lindley Jan Mesina, CPA

August 10, 2018


Bernard "Bernie" Lawrence Madoff was born on April 29, 1938, in Queens, New York, to Jewish
parents Ralph Madoff, a plumber and stockbroker, and Sylvia Muntner. He is the second of three children;
his siblings are Sondra Weiner and Peter Madoff. Madoff graduated from Far Rockaway High School in
1956. He attended the University of Alabama for one year, where he became a brother of the Tau Chapter
of the Sigma Alpha Mu fraternity, then transferred to and graduated from Hofstra University in 1960 with
a Bachelor of Arts in political science. Madoff briefly attended Brooklyn Law School, but founded the Wall
Street firm Bernard L. Madoff Investment Securities LLC and remained working for his own company.

The firm functioned as a third-market provider, bypassing exchange specialist firms by directly
executing orders over the counter from retail brokers. At one point, Madoff Securities was the
largest market maker at the NASDAQ, and in 2008 was the sixth-largest market maker on Wall Street. The
firm also had an investment management and advisory division, which it did not publicize, that was the
focus of the fraud investigation.

The Bernard Madoff scandal is considered to be one of the worst white-collar crimes of all time.
Madoff had tricked his investors by paying them extraordinarily high returns out of their own money or that
of other investors without having engaged in any actual or effective activity to create a profit. Years
previously, Bernard Madoff founded his firm, Bernard Madoff Investment Securities (BMIS), in 1960 with
his savings from his lifeguarding career and borrowings from his father-in-law.

However, on December 11, 2008, Bernie Madoff was arrested for running the largest Ponzi
scheme in history. A Ponzi scheme is a fraudulent investment operation in which 39 investors are paid
returns from either their own money or that of other investors. The scheme had been going on for around
20 years by the time it was uncovered due to the consequences of the Global Financial Crisis. After the
collapse of the finance market in the fall of 2008, many investors wanted to redeem the huge sums of
money that they had invested in year after year, which resulted in claims of redemption of up to $7 billion
from investments that did not exist.

On March 12, 2009, Bernie Madoff pleaded guilty to all 11 federal felony charges against him.
These included charges of securities fraud, money laundering, and perjury. Madoff was eventually
sentenced to 150 years in prison, with the judge stating his crimes were “extraordinarily evil”. Among the
victims of Madoff’s Ponzi scheme were: Elie Weisel, famous for surviving the Holocaust and going on to
win a Nobel Peace Prize; Steven Spielberg, the renowned Hollywood director; and former New York
Governor Eliot Spitzer, whose real estate business was involved.


Rich families placed their money with wealth managers (a high-level professionals who provide
services that combines financial and investment advice). These rich families chose a specialist fund
managers; Bernard Madoff was a favorite choice because of his consistent performance over decades.
They put too much trust and confidence over to Bernard Madoff and thought that he was a genius and that
anyone who didn’t give him their money was a fool.

Although Bernard Madoff told them he was investing the money, Madoff used the inflows to pay
profits back to clients. To prevent his clients from reclaiming their profits, he encouraged them to stay in the
game and earn even more money and then all he needs to do is to tell them how much they are making
periodically without actually providing any real returns.

The financial crisis hit inflows and caused clients to ask for their money back, clients requested a
total of $7 billion back in returns. Unfortunately for Madoff, he only had $200 million to $300 million left to
give with no money to pay out, the fraud was exposed


Most of the major positions in Madoff’s company were occupied by his family members.

Peter Madoff, Bernard Madoff’s brother was the Chief Compliance Officer. He is tasked to determine
whether the performance is in conformity with a predetermined contractual, regulatory or statutory
requirement. A chielf compliance ofiicer must therefore have an INDEPENDENCE to oversee the integrity
of the compliance program. In Madoff’s case, independence was impaired. Peter Madoff may have used
dishonest methods to defraud the clients

Mark Madoff and Andrew Madoff, Bernard’s two sons, worked in the trading arm in the New York
office, and were in charge of fund raising for the company.

Furthermore, Bernie Madoff’s auditing was executed by an unknown accounting firm which turned
out to have only three staff members: a partner, an accountant, and a secretary. Obviously the so-called
‘external auditor’ existed in name only. These auditors are guilty for rubber-stamping Madoff’s fillings with
regulators instead of fully reviewing them.

Bernard Madoff was in charge of all major roles – he was the real sole decision-maker, the
transaction executer, the assets manager, and the financial report writer.

Madoff accountant was also charged with aiding the Ponzi schemes, he manipulated the trades,
including through back-dating, to make customers appear to be getting the steady investment returns they
had been promised. He also concealed the fraud by helping Madoff arrange for customers to received
amended account statements that contained false trading activity.


The Fraud Triangle framework helps us to understand the background of this particular fraud
scheme. The Fraud Triangle is a model developed by Dr. Donald Cressey, a criminologist whose research
focused on fraudsters. According to Dr. Cressey, there were three factors that were present when an
ordinary person committed fraud: Pressure, Opportunity and Rationalization. “Pressure” to make a person
commit fraud or an insider turn against his own company is the aspect of the fraud triangle that motivates
the crime in the first place. In many cases, it is a financial problem of a personal or professional nature or
just greed that underlies the pressure. Next, an “opportunity” needs to be present. The individual needs to
have access to information or other resources of value, and perceive that, if illegally exploited, there is little
risk of being caught. The fear and perception of risk is further lowered by the fact that the root cause of the
pressure is non-sharable – risking his social status may be as big of a risk as the crime itself. Rationalization
is the last leg of the Fraud Triangle. Most insiders that turn against their organization are first time offenders
without any criminal record, and they do not perceive themselves as criminals. Rather, they see themselves
caught in bad circumstances that they are trying to resolve. Rationalizations may include, “I’ll pay the money
back”, “They will never miss the funds”, or “They don’t pay me enough.”
All three conditions (i.e., pressure, opportunity and rationalization) must be present in varying
degrees in order for fraud to occur. A financially strapped employee is not going to commit fraud if the
opportunity is not available, or if the risk of getting caught is too high. Similarly, a person who perceives an
opportunity to misrepresent financial statements and has the incentive to commit the fraud is unlikely to do
so if he or she cannot rationalize the fraud. However, the more pressure a person feels to commit fraud,
the easier he or she can justify it.
Regarding the first element, Bernard Madoff’s incentive was simply a desire to maintain the
lucrative lifestyle to which he had become accustomed or just a “lure of greed”. Besides, Madoff faced the
pressure of maintaining the reputation and profit of the firm. Madoff was struggling to generate sufficient
profits to cover returns for investors that required him to repay early investors with new investors’ money.
Walter (2011) explains that in the eighties Madoff said he saw consistent returns of 15%-20%....a time when
the DJIA went from 800 to 2,722 from 1980 to its peak before the crash of 1987 (a growth rate of about
15% compounded a year). So Madoff could have invested in an index fund and done as well as anyone.
But the sell-off associated with the crash (redemptions) and the slow recovery (low returns) put pressure
on Madoff. That’s when Madoff borrowed from investor capital to pay out redeeming investors and began
falsifying results showing big returns. Those returns became the advertising he needed to get more
With regard to the second element, ‘opportunity’, it seems clear that Madoff took advantage of his
position as head of the company, which gave him more chance to commit a crime without being questioned.
Madoff had enough management power and authority to design the level of internal control and corporate
governance in such an advantageous way for himself. Firstly, it is obvious that the typical segregation of

duties in Madoff’s hedge fund was missing. Normally funds require a segregation of duty between the
investment manager, the broker and the custodian. In Madoff’s case, there was no segregation of duty. He
was all three. He looked after the money, made the investment decisions and brokered the deals (Simon
2017). Secondly, the corporate governance of BMIS had all the key players being the Madoffs with his
brother as the chief compliance officer, his nephew as the director of administration, his sons as directors,
his niece as the general counsel and rules compliance attorney. Thirdly, Madoff approved of and insisted
on using a solo auditor. The auditing company that Madoff hired was Friehling & Horowitz, a firm consisting
of only three employees and one office, and was extremely small despite the scale and scope of BMIS’s
Another opportunity also is, his clients did not question how he continued to yield high returns.
Several large investment banks wanted to invest even though Madoff refused to disclose the means by
which he made these returns. In reality, he was providing them with false statements of profit while he took
their money and invested it in treasuries yielding only 2%. The flow of new clients and the lack of
accountability allowed him to continue his fraudulent operations.
Last but not the least, the rationalization element should be taken into account in order to analyze
Madoff’s fraudulent acts. Firstly, Madoff rationalized that “it was their fault for trusting me”. From his point
of view, the banks and funds that he tricked should have known that there were some problems with the
scheme because they were financial professionals. Secondly, he argued that his victims were rich and none
of them would face poverty after losing their investment. In reality, not everyone was trapped by Madoff’s
hedge fund and the investors who lost were the players joining the game at the very last second. Thirdly,
Madoff tried to justify his fraudulent engagement by persuading himself that the market was rigged anyway
so if he had not done that, others would. There is no room for investors to earn profits from the market
without bearing any risk of being tricked.
Other rationalizations that are stated in the article “The Atlantic” by John Hudson (Feb 28, 2011),
where Madoff rationalized that he tried to give their money back but his friends wouldn’t take it back. He
said that, “Everybody said, 'No, you can't do that. You can't send me my money back. I've been a friend of
yours, or a client, for years' … I couldn't tell them I would have been doing them a favor.” So he had no
As can be seen, it became clear that the existence of Madoff’s fraud was the eventual end result
of all the financial incentives, perceived opportunities and defensive rationalizations described above.


The auditors of the Madoff case are KPMG, Pricewaterhouse Coopers, BDO Seidman and
McGladrey & Pullen. Madoff used a small-sized accounting firm, instead of the large firm to audit their
company. The auditors reported that it was safe to invest in the company, so that many investors were
attracted to invest to them.

Friehling & Horowitz, purported to audit financial statements and disclosure of Bernard Madoff
Investment Securities (BMIS). The following are the findings of the SEC:

 Madoff firm easily performed this scheme because the lack of internal control in the firm and there
were no segregation of duties.
 Friehling deceived investors by declaring that Madoff’s firm had a clean audit record but infact he
did not perform any audit, not even basic procedures such as verifying the existence of assets
which BMIS claimed to possess.
 Friehling did was simply to stamp documents falsely declaring that he had audited BMIS’s finanacial
statements pursuant to GAAS, including the requirements to maintain auditor independence and
perform audit precedures regarding custody security.
 Frielhling also decared that financial statements were aligned with the US GAAP; and the internal
controls of BMIS were adequate.
 Friehling violated the independence and there was conflict of interest because he has an
investment in BMIS, he invested in the firm by disguised under his wife’s account and his family
members invested more than $14 million into BMIS.
 SEC alleges that Friehling and F&H obtained ill-gotten gains through compensation from Madoff
and BMIS.
 Friehling also violated the independence and integrity of an auditor, because it discovered that the
auditing firm was sold their license to Madoff for more than 17 years.

All in all, it can be concluded that not only did Friehling fail to act properly in his role as auditor, he also
failed to meet the ethical standards of his profession.


Madoff received a jail sentence of 150 years. His CFO and auditor have pleaded guilty, and about 25
people, including his family members, have pleaded guilty of crimes. The following are his indicted Co-
inspirator who pleaded guilty of their crimes;

 David G. Friehling, 49, the sole practitioner at Friehling & Horowitz CPAs,
 Frank DiPascali, 52, the CFO of the Madoff Investment Securities and also known as the” director
of option trading” pled guilty on August 11, 2009, to 10 counts: conspiracy, securities fraud,
investment advisor fraud, mail fraud, wire fraud, perjury, income tax evasion, international money
laundering, falsifying books and records of a broker-dealer and investment advisor. He is sentenced
with maximum imprisonment of 125 years.
 J. Ezra Merkin, a prominent investment advisor and philanthropist, has been sued for his role in
running a "feeder fund" for Madoff.

 Joann Crupi (Westfield, NJ) and Annette Bongiorno (Boca Raton, FL), both back office employees,
were arrested in November 2010. Crupi is the assistant of Madoff who is sentenced with 65 years
of imprisonment. On the other hand, Bongiorno was the manager and was responsible for
answering questions from Madoff's clients about their purported investments. She oversaw the
fabrication of documents and was sentenced for a maximum imprisonment of 75 years
 Jerome O'Hara and George Perez, the computers programmers of and was the long-time
employees in Madoff’s investment securities were charged in an indictment in November 2010,
and in a 33-count superseding indictment on October 1, 2012. They are sentenced with a maximum
of 30 years imprisonment.
 Less than $30B have been discovered, and many personal assets have been sold to repay
 In November 2015, Picard announced that $1.42 billion has been authorized by U.S. judges to be
given to victims of the scheme. Individual distributions would range from $1,287 to $200.4 million
according to Picard.


In accordance with the Code of Professional Ethics, the principle of integrity requires the CPA to
stand up for what he believes is true. In this case, Friehling's and F&H's, the auditor of Bernard Madoff’
Investment securities, misconduct is egregious. Friehling essentially sold his license to Madoff for more
than 17 years for Madoff to be undetected with his Ponzi Scheme. Instead of acting for the public interest,
he deceived investors and regulators by declaring that Madoff's enterprise had a clean audit record and
was audited pursuant to General Accepted Auditing Standards (GAAS), including the requirements to
maintain auditor independence and perform audit procedures regarding custody of securities.

When dealing with financial reports, the auditor must apply professional skepticism about the
internal control system and specific risks of the business which could lead to material misstatement of
opportunities for fraud. Though it is necessary to determine the materiality, the auditor needs to show care
in detecting fraud regardless of its materiality. According to the Corporation Act and Crime Act, the auditor
has a duty to report fraud. If any suspicious situation arises the auditor needs to inform the appropriate level
of management.
Contrary to the said responsibilities, F&H also made representations that BMIS financial statements
were presented in conformity with Generally Accepted Accounting Principles (GAAP) and that Friehling
reviewed internal controls at BMIS, including controls over the custody of assets, and found no material
inadequacies. Also they obtained ill-gotten gains through compensation from Madoff and BMIS which
clearly impairs their independence and also creates a self-interest threat.

In addition, there exist conflicts of interest. Such as Madoff’s election of family members in the
executive positions that creates a possible agency problem; him being the former head of NASDAQ, his
strong relationship with SEC compliance examiner and good friends with the former SEC Chairman.

Madoff’s scandal was not accidental but it was surprising for the educators, regulators, monitoring
authorities and community in general to know how long it took to discover the fact. The main lesson to be
learned by this event is that auditors’ due diligence means more than just dropping by for a visit or relying
on the opinions of others. It is a methodology that encompasses all aspects of an investment management
organization, including investment policy, trading patterns and verification of investment returns. While
there is no official handbook or checklist, a skilled due diligence audit team should have the experience
and know-how to complete the process.


The investors should conduct a background research of the company that they plan to invest in.
Before making a financial decision they should research about the company’s and the owner’s details, the
company’s licensure on investment trading , make a note of any red flags and immediately report them to
regulators or officials for investigation and if possible share it to the pubic via mass media. Investors should
not build trust on what the others personality expressed because this can be deceiving and should not trust
schemes that guarantee high or over-consistent return on investment.

The government and their regulators should be thorough and strict on their investigation. SEC
exists to protect investors, uncover frauds that are happening in the market and protect the public interest.
They should set up customer service department to follow-up complaints from investors, be more
professional in approaching those complaints by executing detailed investigations. Most importantly, Sec
should send spies to the company in order to understand how the company runs and what actions are used
to fraud investors and should increase punitive on people running fraud businesses and also to their own
auditors or employees that will perpetrate a fraud.

Bernard Madoff should not have involved his family members into his fraud and have even
committed the fraud as it made him betray the trust of his peers.

Knowing about the fraudulent act by Madoff, his family members should have stop him from going
any further and cause major damage to others. Family should choose not to be involved in the scheme by
not helping him and should not be overwhelmed by the Power of Greed.

The company should have segregation of duties, experienced and diverse staff and executives so
they cannot be easily defraud by someone in higher position and even with the same level of position,

programs and trainings that will continuously develop the skills and knowledge of the employees and that
will instill to them the importance of compliance with the standards, rules and regulations. Most importantly,
a company should have strong internal control. The stronger the internal control the more assurance it
provides about the reliability of the accounting data and financial statements.


 https://en.wikipedia.org/wiki/David_G._Friehling
 https://scholars.unh.edu/cgi/viewcontent.cgi?article=1099&context=honors
 https://en.wikipedia.org/wiki/Bernard_Madoff
 Malicious insider psychology – when pressure builds up in the Fraud Triangle
Available at: https://www.computerworld.com/article/2845934/security0/malicious-insider-
 Bernard Madoff Is The Fraud Triangle
Available at: https://www.forbes.com/sites/walterpavlo/2011/03/01/bernard-madoff-is-the-fraud-
 Lessons from Madoff
Available at: http://www.lotusamity.com/events/accountingshenanigans/madoff-lessons/
 Bernard Madoff: The key players
 https://en.wikipedia.org/wiki/Madoff_investment_scandal
 Madoff's Most Astounding Rationalizations
 https://www.sec.gov/news/press/2009/2009-60.htm
 https://www.businessinsider.com/sec-charges-madoff-auditor-with-fraud-too-2009-3
 Abkowitz, A. 2008. Madoff's auditor... doesn't audit? Available at:
http://archive.fortune.com/2008/12/17/news/companies/madoff.auditor.fortune/inde x.htm
 Albrecht, Steve, 2014, Iconic Fraud Triangle endures, Fraud Magazine, Association of Certified
Fraud Examiners, Inc.
 American Institute of Certified Public Accountants (AICPA) 2015. Code of professional conduct.
Available at: http://www.aicpa.org/Research/Standards/CodeofConduct/DownloadableDocume
 https://en.wikipedia.org/wiki/Madoff_investment_scandal#References
 Malicious insider psychology – when pressure builds up in the Fraud Triangle
Available at: https://www.computerworld.com/article/2845934/security0/malicious-insider-
 Buchholz, K. A. 2012. SAS 99: Deconstructing the Fraud Triangle and Some Classroom
Suggestions. Journal of Leadership, Accountability and Ethics. 9(2):109-118.
 Hurt, C. 2009. Evil Has a New Name (And A New Narrative): Bernard Madoff, Illinois Law and
Economics Research Papers Series Research Paper No. LE10-021
 Bernard Madoff Is The Fraud Triangle
Available at: https://www.forbes.com/sites/walterpavlo/2011/03/01/bernard-madoff-is-the-fraud-