The man Enid it managed to keep the scheme running for over 15 years in one of most monitored economic systems in the world. The man in charge of the operation, Bernard L. Maddox, got arrested for his scheme and pled guilty to the embezzling of billions of US dollars. It struck many as unimaginable how such a fraud could occur in an environment so carefully controlled by regulations and supervised by different institutions. Determine the regulatory oversight that was in place while the Opinion scheme was operating, and speculate on the main reasons why they did not discover the scheme.
Opinion scheme defined by Investigated as A fraudulent investing scam promising high rates of return with little risk to investors. The Opinion scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. These schemes usually collapse on themselves when the new investments stop. ” There are two important regulatory oversight body had its presence while such Opinion scheme was operated, 1) Securities and Exchange Commission and 2) External Auditor.
The outside investors will get real information about a company through these two bodies. It is evident that one individual named Harry Marko’s complaints file several times with Securities and Exchange Commissions (SEC) regarding the violations of securities laws by Maddox. But SEC did not take any action or did not start any investigation against the company. Role of SEC: The SEC had the authority to investigate Madam’s investment business, which managed billions of dollars for wealthy investors and philanthropies.
As per Marko’s statements, it reveals that the staff layovers was working in SEC had lack of experience on financial industry or lack of training to conduct investigations. He said on it, “in my experience, once a case is turned into SEC, the SEC claims ownership of it and will no longer involve the investigation. ” It is obvious that if fraud was unnoticed for long time, the SEC or any regulators need not only more staff but also more specialized staff to handle future unique situations of Maddox kind.
Role of External Auditor: It is exceptional and unfortunate that the external auditor of Maddox Securities named Fringing and Horopito had direct investment in the company which is unique. In such a case, the scope of audit conduct will be influenced for sure and the audit report will be questionable. Assume you are an auditor for a firm that had $10 Million dollars invested in Maddox Securities. Determine the fundamental audit procedures that you should have applied to this investment.
The principal goal of independent auditors would be to establish the accuracy of accounts presented and confirm the actual existence of assets recorded. To achieve this, a number of audit tools should be employed including a review of the audit procedures used, analytical measures adopted, risk assessments and materiality decisions. Such processes will identify inherent and control risks that contribute to misstatements in balance sheets and accounting information. To ensure that detection risk is as low as possible, a careful audit of key transactions should be undertaken to confirm the degree of accuracy.
By addressing issues of materiality, the review will further qualify the accounts presented and ensure that the investment firm is not being hoodwinked by the investment advisor. This exercise will eliminate misstatements that overstate the financial health of an investment fund and provide crucial evidence that will dude the investment firm’s financial decisions. Predict the way in which the peer review of Fringing and Hornwort would have uncovered the scheme related to Maddox Securities.
A peer review is an independent evaluation of a professional entity s work by a peer in the same industry. A peer review will involve a detailed examination of the firm’s accounting work by another firm with no ties to the entity being audited. This process ensures industry standards are maintained, accounting practices are above board and that conflicts of interest are eliminated. A peer review would have detected Madam’s fraud because questions would have been raised about the resource capability of the firm to handle such a large account effectively given that it had one accountant.
The fact that the firm held accounts with the Madam’s firm were sufficient grounds to impute a conflict of interest and suggest that accounts presented would be tainted with misstatements meant to portray a rosy picture. Pretend you are Harry Marko’s and suggest one strategy, different from that of the case study, to expose the potential fraud. Provide a rationale to support the suggestion. Harry Marko’s had a significant role in chasing the irregularities of Maddox securities in different times which was big news at the time and took coverage among financial market.
He raised twenty-nine red flags, some of these are based on gossip, hearsay, innuendo and rhetoric?the type of soft information that can easily be dismissed by a lawyer with natural skepticism toward such evidence. In my view, it is very unrealistic to believe in a constant growth wherein the market scenario is different. In such case, SEC has the only and most influential institute to restore the trust of the investors. They should conduct a vigorous investigation on Maddox activities independently and publish it to the investors so that it becomes crystal and clear to all of them. But they did not do their job.
They are that much responsible for that scam as Maddox is. Analyze the role of audit committee for Maddox Securities in regard to the Discovery of Opinion Scheme and suggest one action the audit committee could have taken in order to prevent or detect the fraud. Provide rationale to support the suggestion. What I revealed that Bernie, the head of Maddox Securities was the all in all of the company. He intentionally avoided all the disciplines of the company and restricted to do the jobs at different level of Management. The member of the management was mostly the family members of Maddox.
So, basically there was no internal control in the management and no accountability. Moreover, he influenced the external auditor of the company who is the only spokesman on behalf of the investors. That’s how he closed all the windows and pursued to do whatever he wanted. In my view, it is unfair to be an external auditor conducting audit in the same company for more than 4 years because it definitely influences the independence of an auditor. Conclusion Bernard Madam’s fraudulent investment scheme is likely to be the hallmark event of these times in future history books.
It will likely be analyzed in numerous ways. The lesson for all investors, today, however, is very simple and one which all investors in equities should embrace from day one: You will lose money at times There is no such thing as a sure thing investment system To believe otherwise is extremely unsophisticated. The real conclusion from this is that Madam’s investors, contrary to the way they are portrayed in most of the Edie coverage, were not sophisticated when it comes to the investment world. References 1. Were Maddox Case: A Timeline”.