ACC 562 Week 3 Assignment 1 Madoff Securities(USE AS A GUIDE ONLY)

Assignment 1: Madoff Securities
Review the Madoff Securities case.
Write a four to five (4-5) page paper in which you:
Determine the regulatory oversight that was in place while the Ponzi scheme was operating, and speculate on the main reasons why they did not discover the scheme.
Assume you are an auditor for a firm that had $10 million dollars invested in Madoff Securities.
Determine the fundamental audit procedures that you should have applied to this investment.
Predict the way in which a peer review of Friehling and Horowitz would have uncovered the scheme related to Madoff Securities.
Pretend you are Harry Markopolos and suggest one (1) strategy, different from that of the case study, to expose the potential fraud. Provide a rationale to support the suggestion.
Analyze the role of the audit committee for Madoff Securities in regard to the discovery of Ponzi scheme, and suggest one (1) action the audit committee could have taken in order to prevent or detect the fraud. Provide a rationale to support the suggestion.
Use at least two (2) quality academic resources in this assignment. Note: Wikipedia and similar type Websites do not qualify as academic resources.

Preview document (2 of 7 pages)

Running head: MADOFF SECURITIES
1
Madoff Securities
ACC562
Professor
MADOFF SECURITIES
2
Madoff Securities
Madoff Investment Securities LLC (BMIS) was typically referred to, as Madoff
Securities was a stock brokerage firm established by Bernard L. Madoff a New Yorker with a
driving force of becoming wealthy. Madoff said that he used the investment strategy Split strike
conversion, consisting in buying shares of big companies and buying and selling of those same
securities, options to gain so much in markets on the rise as low. This was not new to investment
banking, but what was done in this case, was to offer yields guaranteed between 8% and 15%,
regardless of what was in the stock, and with very little volatility. The fraud is that the promised
return was paid with money entered through the entry of new customers (Rittenberg, Johnstone,
Gramling, & Knapp, 2012).
The fame predicted to Madoff attracted plenty of investors. Rather than carry out the
indicated investment technique, rising progressively its financial pyramid. In this way, BMIS
was receiving new funds, which were not reinvested in its entirety, just a fraction. With the rest,
paid to initial investors agreed yields and commissions to distributors of its product. In addition,
Madoff managed to attract funds through management companies of large estates and large
funds like the "Optimal" Fund, through the payment of economic incentives strong who
marketed them, being massively offered in various formats.
The failure of the regulatory oversight function for the stock market helped Madoff to
sustain his fraudulent scheme. If federal regulators, particularly the SEC, had been more diligent
in fulfilling their responsibilities after even receiving 29 red flags handed by Harry Markopolos a
financial analyst and fraud investigator from Boston, in the beginning of 1999. The reason that
situation didn’t caught the attention of regulators perhaps is the result of a combination between
the personal prestige of Madoff and some gaps in the system that were carefully exploited. As
MADOFF SECURITIES
3

former President of the electronic stock market Nasdaq with a long list of other senior officials
and generous donor to charities, he was a man who inspired confidence. In regards to regulators,
stock market surveillance (SEC) authorities regularly inspect Bernard L. Madoff Investment
Securities but not the other investment advisory firm. The firm handled a high-risk fund which
was not registered with the SEC as of September 2006, and according to reports, was never
inspected since then. With all that, they are beginning to arise details about previous
investigation of the SEC's Madoff business. The SEC said that its operation of titles was
investigated in 2005 and found that it violated rules requiring agents to get the best possible
price. A second investigation of the SEC in 2007 apparently did not discover any irregularity
(Rittenberg, Johnstone, Gramling, & Knapp, 2012).
Another regulatory oversight existing while the Ponzi scheme was operating was the lock
of peer reviews in the New York state legislature to require accounting firms that provide attest
services to be peer reviewed every three years (Rittenberg, Johnstone, Gramling, & Knapp,
2012). The truth is that, it managed to outwit the intelligence of fund managers in first row, of
the major banks of the world, from its own auditors and, mainly, the regulatory body for
financial markets of the first power world, the Securities Exchange Securities (SEC). According
to first estimates, more than 20 firms have already recognized its exposure directly through their
own funds or structured products made by Bank treasury departments, or indirectly, by investing
in a hedge fund or alternative management with exposure to Madoff’s funds.
Madoff Securities was audited by a one-man accounting firm named Friehling &
Horowitz whom did not followed audit procedures for a client handling such investments. If I
was an auditor for a firm of this caliber I would had organized a Committee within the company
which specializes in the control of a proper handling of investor funds, matching what Madoff