SOUTHWESTERN ASSEMBLIES OF GOD UNIVERSITY

Auditing

ACC 4453.00

Instructor: Dr. Sharon Price

Case Study #1

Madoff Securities

STUDENT DATA:

Name: Geoffrey Austin Todd Henderson

E-mail: geoffreyaustinthen@lionmail.sagu.edu

Phone: 520-343-9013

Semester: Spring 2015

Date: 02/20/2014

Bernie Madoff perpetrated one of the grandest Ponzi schemes in American history and

recently turned himself in to prosecutors in 2008. Recent developments have only added to the

terrible after-effects that this fraud has created:

Harry Markopolos has risen to fame. This man led fraud investigations out of Boston and

reported evidence to the SEC five times between 2000 and 2005. The recent vindication

of his earlier claims has made many people believe he should play a role in the leadership

of the SEC.

Mark Madoff, son of Bernie Madoff, committed suicide in 2010. “As he pitched himself

into eternity with a noose fashioned from a dog leash, 46-year-old Mark Madoff was

being pursued by lawyers who aggressively doubted his protestations of innocence”

(Daly, 2011, p. 16).

One of Madoff’s scheme’s greatest beneficiary’s, Jeffry Picower, (made $7 billion over

time solely from Madoff) was found dead at the bottom of his pool in 2009. “Naturally,

when Picower's wife found him at the bottom of the pool at their Palm Beach, Fla., home

on Oct. 25, speculation about what had happened ran wild” (Kiviat, 2009, p. 17).

Peter Madoff, brother of Bernie Madoff, plead guilty in 2012 of his involvement in the

scandal. He was sentenced to ten years in prison. “Madoff's younger

brother Peter arrested for his role in the scheme” (Ross 2012).

In 2012, Andrew Madoff, the other son of Bernie Madoff, died from health

complications. “The almost impossible to believe tragedy of Bernard Madoff continued

on Wednesday with the death of the convicted Ponzi schemer's only surviving

son. Andrew Madoff had been battling mantle cell lymphoma. He was 48” (Vardi, 2014,

p. 22).

Irving Picard, who is “the court-appointed trustee charged with recovering the billions of

dollars stolen or misused by Madoff” is continuing to sue those who have been victims of

this scheme (Knapp, 2015, p. 172).

If a large investment firm had at least 10% of its investments in funds managed by

Madoff Securities, as an auditor, that should warrant a thorough check-out of Madoff Securities.

Especially given the fact that Madoff was always, always successful. Were the auditors not

aware of who was checking up on Madoff Securities? Did they just not care enough to do a

thorough investigation? The internal auditors should especially be asking the tough questions

about Madoff. The external auditors should be concerned about the type of auditors that are

conducting the audits on Madoff Securities. They would need to have enough experience to be

able to complete the fieldwork for a large, complex company. One look at Friehling & Horowitz

would tell you that they did not. If such a high proportion of your investments are in one place,

you should be making sure that one place is foolproof. That was not the case in many of these

audit firms who had large amounts of their investment portfolios tied up in Madoff-managed

funds.

A “peer review” is one auditor, or group of auditors, taking a look at the work of fellow

auditors and determining if the work was thorough, professional, and done in an un-biased

manner. If there would have been a peer review of Friehling & Horowitz, the Madoff fraud

would have been discovered much sooner. A simple look at the offices of Friehling & Horowitz

would have determined that they did not have enough personnel to be taking on the size of client

such as Madoff Securities. The New York Society of CPAs should have been more investigative

on whether or not Friehling & Horowitz actually did audits. As sad as it is to think, it is very

naïve to take someone at their word. Not one other CPA questioned the operation of Friehling &

Horowitz and that is what allowed this atrocity to continue year in and year out.

There are three conditions that seem to be present when fraud is occurring. There is

incentive, attitude, and opportunity. Fraud risk factors include “…management’s characteristics

and influence over the control environment, industry conditions, and operating characteristics

and financial stability” (Mock & Turner, 2005, p. 61). Madoff felt the pressure of high rates of

return for his customers. The pressure only increased because of the fraudulent beginning of his

successes. The incentive was the big money that was coming in. The opportunity lay within the

capability of having Freihling & Horowitz do a clean audit every year. The attitude of it being

justified in the mind of Madoff came from the fact that he technically never got caught. Madoff

served on numerous committees and advised many people. If there was anyone who was not

committing fraud in the minds of the people, it was Madoff. These were incredibly big risk

factors that led to Madoff being able to scam people for decades. There was no internal control,

no external control, and this lack of control led to one of the greatest frauds to ever occur.

Mandatory peer reviews are something that needs to happen at least every few years. The

types of firms such as Friehling & Horowitz cannot be allowed to operate in the way that they

did for so long. Each state society and the AICPA should be doing more thorough check-outs of

the CPA firms that are a part of their make-up. This sort of self-governance becoming mandated

might serve well in the future to prevent more “untouchables” such as Madoff from destroying

the lives of people who trusted in him.

Bibliography

Daly, M. (2011). The Worst of the Madoff Crimes. Newsweek, 158(18), 16.

Kiviat, B. (2009, November 9). Jeffry Picower. Time, 17.

Knapp, M. (2015). Madoff Securities. Contemporary Auditing, 10. 165-172.

Mock, T. J., & Turner, J. L. (2005). Auditor Identification of Fraud Risk Factors and their Impact on Audit

Programs. International Journal Of Auditing, 9(1), 59-77.

Ross, B. (2012). Madoff’s Brother. World News With Diane Sawyer, 1.

Vardi, N. (2014). The Madoff Tragedy Continues With Andrew Madoff's Death. Forbes.Com, 22.