The Detailed Analysis Of Bernie Madoff
‘The Man who stole $65 Billion dollars’ was the headline of all major newspapers back in December 2008 when what’s stated to be one of the world’s worst financial scandal ever was finally discovered. The mastermind, Bernie Madoff, founder of Bernard L. Madoff Investment Securities managed to defraud investors of 50 Billion Dollars. Furthermore, these investors weren’t just ordinary people with no financial expertise, but the list included of some of the world’s most famous economists, banks, and huge financial institutions whom the world trusts and looks up to for guidance. Further we will this case in more details while noting the obvious facts that were omnipresent in this case which should have caused various alarm bells to ring in the minds of these investors and the banks.
Control is a binary function in corporations, either you have it, or you don’t. Firstly, lets discuss the basic internal control mechanisms a corporation must have if it is existing in the market today and compare it to that in place at Bernard L. Madoff Investment Securities. The company showed very poor control mechanisms while they were running their operations. Ideally, there must exist some mechanisms at every level along with quarterly and annual reporting of each department in all aspects is a key example.
The most mindboggling fact in the Madoff case personally was to see that the auditors of the $65 Billion fund was a sole practitioner accountant with just 2 employees. Just to think that a total of 3 people were in charge of auditing a corporation of that magnitude is hard to digest. Not to mention the fact that the compliance officer of the firm was Madoff’s niece. The compliance officer is responsible to make sure the firm is meeting and running its operations under the requirements set under law and securities regulation committees.
The article states various potential business partners had previously raised their concerns about the fund’s activities with the SEC, which in turn, did start an investigation against the fund but only in a superficial fashion yielding no hard results. How does that go unnoticed by the securities and exchange commission? In an ideal scenario, there must be an internal audit committee and an independent external auditor for any corporation. The internal audit ought to report directly to the audit committee so they can fix the problems and the external audit committee works to show a clear picture of the corporation to the investors. The company must aim to be classified as unqualified in the auditor’s reporting. When a company is judged to be unqualified by its auditor, it shows the company’s financial statements are accurate, fair and presented appropriately in accordance with the generally accepted accounting principles (GAAP). (Unqualified Opinion, By Alicia Tuovila)
To quote the article, “Madoff had used money from new investors to pay returns to older ones. It was an investment pyramid, a house of cards that had to fall sooner or later.” This goes to show Madoff’s corporation was also cooking it’s accounting books in order to show its growth. It is the duty of any organisation to prepare its financial books in accordance to the generally accepted accounting principles. One of the problems with financial statement is that they follow accrual income basis of reporting revenue which various corporations use as a key tool to manipulate their accounting books. To assess the actual position of any corporation, one must go beyond the financial statements to other sources, like cash flow statements, balance sheets, finance sources other than equity, quick ratio, debtor’s turnover ratio, etc. The cash flow statement explains where the investor’s money is going at each step. ‘If the market is not looking in the right places, nor asking the right questions, then it is bound to be surprised.’ (Financial Times, 6th Nov 2008). Does this mean nobody was looking at the right places while investing in Bernard L. Madoff Investment Securities, not even the banks or the economists? These are the people who are meant to apply due diligence before investing their clients' money.
References:
- Madoff – the man who stole 65billion by Erin Arvedlund https://www.independent.co.uk/arts-entertainment/books/reviews/madoff-the-man-who-stole-65-billion-by-erin-arvedlund-1796251.html
- Unqualified Opinion, By Alicia Tuovila – Investopedia.com https://www.investopedia.com/terms/u/unqualified-opinion.asp
- ‘If the market is not looking in the right places, nor asking the right questions, then it is bound to be surprised.’ (Financial Times, 6th Nov 2008)
