Case 1.12:Madoff Securities

Topics: Bernard Madoff, Ponzi scheme, Audit Pages: 5 (1261 words) Published: December 2, 2012
Case 1.12:
Madoff Securities
1.Research recent developments involving this case. Summarize these developments in a bullet format.

2.Suppose that a large investment firm had approximately 10 percent of its total assets invested in funds managed by Madoff securities. What audit procedures should the investment firm’s independent auditors has applied to those assets?

3.Describe the nature and purpose of a “peer review.” Would peer reviews of Friehling & Horowitz have likely resulted in the discovery of the Madoff fraud? Why or why not?

4.Professional auditing standards discuss the three key “conditions” that are typically present when a financial fraud occurs and identify a lengthy list of “fraud risk factors.” Briefly explain the difference between a fraud “condition” and a “fraud risk factors,” and provide examples of each. What fraud conditions and fraud risk factors were apparently present in the Madoff case?

5.In addition to the reforms mentioned in this case, recommend other financial reporting and auditing-related reforms that would likely be effective in preventing or detecting frauds similar to that perpetrated by Madoff.

1. Recent developments involving the case Madoff Securities:

Bernie Madoff’s son, Mark Madoff committed suicide on December 11, 2010. His suicide may have been influenced because there was an investigation on Mark’s children on grounds that Bernie transferred funds to their accounts.

Peter Madoff pleaded guilty to his involvement in the Ponzi scheme run by his brother. Peter Madoff served as the chief compliance officer.

Irving Picard, the trustee in charge of liquidating Madoff’s assets, has asked a New York court for approval to distribute an additional $1.5 billion to investors who lost money in Madoff’s fraudulent investments. It is estimated that Picard has already recovered $9.1 billion but has only been able to distribute $1.1 billion so far.

In May 2010, about 720,000 Madoff investors outside the United States settled with their banks, receiving about $15.5 billion in all, according to law firms representing them.

In June 2012, the Supreme Court said it would not take up a dispute over how the claims of victims of Mr. Madoff’s huge Ponzi scheme should be calculated. Without comment, the high court declined to hear an appeal from lawyers for investors who got back all the cash they had invested with Mr. Madoff before his December 2008 arrest.


If a large investment firm had approximately 10 percent of its total assets invested in funds managed by Madoff Securities, the audit procedures that the firm’s independent auditors should look very closely are some procedures that will help the auditor to identify inherent and control risks that contribute to misstatements in balance sheets. He/she should make sure that the detection risk is as low as possible and the key transactions are confirmed for its accuracy. By addressing issues of materiality, the auditor will eliminate misstatements to overstate the investment on the balance sheets.

PCAOB AU Section 329A states that understanding financial relationships is essential in planning and evaluating results of analytical procedures and generally requires knowledge of the client industry. The auditor, by understanding the nature of the business can identify and categorize the types of risk that can be assessed. The auditor will have to do research about the business and how transactions are handled and processed. Knowing about the client’s business the auditor will better obtain sufficient, reliable, and relevant evidence to achieve his audit objectives.

Analytical procedures are used as a substantive test where the auditor considers the level of assurance he/she wants from the substantive test for audit objective. The independent auditor main goal is to be able to establish the accuracy of major accounts and confirm that...
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