Madoff's Busines Case (Coursework Sample)

The Madoff Case
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Introduction
The cases of perpetrating fraud in the past few years have become rampant in the Ponzi Schemes (Arens et al., 2013). Both trust and greed drive people trading in such businesses. For instance, they select a few investors who they pay high returns above the normal rate of return to entice many more to join. In the process, the new investors gain trust from the boasts posted by those few investors who are paid very high returns. Greed purely drives the people driving these businesses. Similarly, lack of proper auditing procedures creates a loophole for the individuals engaged in the Ponzi Schemes to continue stealing from the innocent individuals. This particular task concentrates on the Bennie Madoff Ponzi Scheme in which Bennie perpetrated fraud due to inadequate audit procedures.
Based on the case study, the fraudsters have gained professional trust affiliation, direct observation, and references. The has five sections in which the first section determines the regulatory oversight that was currently available while the Ponzi Scheme was operating and speculates on the main reasons the scheme was not discovered. Secondly, the paper determines the critical and fundamental auditing procedures that should be applied in the scheme. Thirdly, the paper predicts how Friehling and Horowitz could have discovered the scheme related to Madoff Securities. Fourthly, the paper presents a strategy that could be used to expose the fraud. Lastly, the task analyzes the role of the auditing committee for the Madoff Securities.
A regulatory oversight in place while the Ponzi scheme was Operating.
The available regulatory committee at the Madoff Securities only consisted of one employee. The employee in question was possibly blinded with a higher salary and instead of entering all the financial transactions into the right books ignored to record such transactions. Similarly, the particular investors who received higher returns did not bother to check the books of accounts. There are two possible reasons why the scheme was not discovered. Firstly, despite the fact that Madoff Securities indicated that there was a CPA firm regulating its activities, there was no audit that was done. Audited books of account could have helped to pinpoint the possible fraud that was taking place. Secondly, investors never asked for the audited information possibly because of the high returns that they received.
Fundamental Audit Procedures
The identified audit procedure will state the assertion to be tested, audit procedure and why the procedure is the most appropriate (Hayes, Wallage & Gortemaker, 2014). For instance, for a firm that invested $10 million dollars at Madoff Securities, the fundamental audit procedures to test the assertion of completeness and the accuracy are the inspection, observation, external confirmation, recalculation and re-performance. To begin with, as an auditor I would have inspected all the documents and records to check on reliability.
During the inspection, it will also be critical to carrying out a physical inspection to compare the value of the assets and the recorded amount at the end of the year period. Secondly, I would have observed how the Madoff Securities applied the procedures and policies. The observation could have been critical in providing assurance of the recorded figures in the books of accounts (Porter, Simon & Hatherly, 2014). Observing the movement of cash could have also helped to countercheck the figures recorded in the cash flow statement.
The third fundamental procedure could have been the external confirmation. External confirmation from the third parties would have helped in comparing the written requests to the reconciled figures in the books of accounts. The fourth procedure is the recalculation or computing and recalculating the provided figures against those indicated in the books. Recalculating will be significant in identifying loopholes in the accounts. For instance, if the figures are far above or below the correct amount then there must have been an indication of fraud (Zadek, Evans & Pruzan, 2013). The last audit procedure could have been re-performance. An example of a re-performance technique is the computer-assisted technique (CAAT) which will help greatly in identifying areas of weakness in the accounting system. As noted in the case study, the Madoff securities only had one CPA employee who never even bothered to take a keen interest in recording the books. Similarly, the case study indicates the CPA in place never undertook any auditing within the Madoff Securities.
Peer Reviewing of Friehling and Horowitz
The peer review of Friehling and Horowitz could have been significant in examining and reviewing the Madoff Securities’ systems and procedures. The peer review helps in determining whether Madoff Securities practiced quality attestation in its service provision. The peer review could have also helped in determining the level of accuracy and effectiveness in the recording of the accounts (Zadek, Evans & Pruzan, 2013). Majorly, the peer reviewing examines attestation services of the practicing units. It is an essential process in uncovering the inappropriate use of auditing procedures. Therefore, by using the peer review process, the scam in the Madoff Securities could have been uncovered.
Strategy to Expose the Fraud
The alternative strategy that could have been used to uncover the Madoff Securities scam is the auditing trail. Auditing trail technique is essential in tracing all the transactional activities that take place in a defined period (Hayes et al., 2014). The rationale used would have included the tracing the scrupulous transactions especially the abnormal returns accorded to some investors. As indicated in the case study, the special investors were rewarded abnormal returns to brag so that they could attract more investors to the scheme.
The boasting of the few highly rewarded investors attracted the innocent investors to the scheme. After attracting the ...