Bernie Madoff, who founded his investment company in 1960, was the genius behind the $50 billion Ponzi scheme scam that stunned the world economy. It was the most extensive and longest-running Ponzi scheme fraud in history. According to his deception strategy, Madoff utilized investments to repay his initial backers, giving the impression of a profit and encouraging further investors to join him. In actuality, the firm had no revenue nor means of reimbursing future investors. To gain investors’ confidence, Madoff constructed fake accounts and statements. Thousands of fabricated customer statements and balance sheets made up the Ponzi scam (Williams, 2017). Madoff’s climb began with a relatively tiny investment and consumers who were relatives, friends from work, and acquaintances. To avoid the observation of both the SEC and national securities authorities, Madoff took the route of illegal, unlicensed investment counselors as his firm expanded, yet it grew exponentially. In this sense, the fraud strategy used in this instance was well thought out and calibrated.
Meanwhile, many persons were connected to the scam, including crooked auditors and accountants, family members in positions of authority, and SEC agents. In the end, it took multiple whistle-blowing initiatives to bring the dishonest firm to justice. The way the audits were handled and the whistleblowers’ actions made it feasible for Madoff to go on with his scam for a lot longer than he should have been able. Madoff operated a purposefully dishonest company to benefit himself, and he was allowed to operate unchecked because the SEC pushed him to establish a “third market.” His operation casts a poor light on investment firms and accountancy in general. This situation exemplifies ambition, confidence, effectiveness, and treachery.
An analytical technique called data visualization can help auditors quickly search through a database or transaction history to find the most troubling transactions to look into (Williams, 2017). An essential step in detecting fraud is data analysis to find transaction irregularities. Interactive visualization tools that enable the investigator to switch from text to graphic representation of data and select particular subsets of transactions for additional investigation have a great deal of potential to increase the effectiveness and efficiency of the fraud detection process transactions (Williams, 2017). The criminals fabricate and alter data to produce a convincing scenario that is nearly hard to distinguish from actual data during a routine audit. Traditional audit techniques using statistical sampling frequently fail to detect fraud because fraudulent behaviors are intentional and non-random (Williams, 2017). Techniques for data visualization are more helpful in this situation to find such phony data.
If we thoroughly examine the Madoff case of fraud, he explained his three-part “split strike conversion” investing method, which he used to invest client money. He explained to customers that he initially bought common shares from a group of 35 and 50 Standard & Poor’s 100 Index businesses, whose performance was consistent with that of the market. According to market capitalization, the S&P 100 Index covers the 100 biggest publicly traded firms, which was a wise investment. Second, as a buffer against losses during unexpected market downturns, he acquired and sold options contracts. Third, he exited the market, bought U.S. Treasury Bills when it was falling, sold them, and returned when the price was increasing (Williams, 2017), which appears to be a very plausible explanation at first glance. While this was going on, all investors who put money into the Madoff scheme or provided him money to invest with received their returns as promised. In order to help him out, Bernie asked his father-in-law to gather money from multiple investors and then provide the complete sum to Bernie into one account to invest in. Additionally, the SEC believed he had fewer clients due to this (Williams, 2017). Conventional audits would never discover these arrangements.
Incentives, opportunities, and rationalizations are the three essential components of the Fraud Triangle, which informs much of how we now view fraud prevention strategies (Williams, 2017). According to Cressey’s fraud triangle, which has three essential components—motivation or compulsion to commit fraud, opportunity to carry it out, and justifications for the crime—corporate crimes are more likely to occur. People will be encouraged to do fraudulent activities in which each ingredient plays an equally significant part in the existence of all three (Williams, 2017). According to an analysis of Madoff’s personal life related to Cressey’s fraud triangle, he gained access to all three elements. When it comes to the motivational component, it depends on one’s position, which may be influenced by either a desire to succeed or a fear of failing (Williams, 2017). Before establishing Bernard L. Madoff Investment Securities Company, Madoff determined he wanted to get wealthy by working as a stockbroker when he was 21 (Williams, 2017). This gives the impression that he was driven to become wealthy at all costs. He felt pressed to make a significant sum of money.
Madoff, in contrast side, was under pressure to uphold the firm’s image and profitability in order to keep the present investors as well as draw in new ones. Similar to opportunity, the second component of a fraud triangle refers to the perception that fraud may be performed without being discovered (Williams, 2017). Madoff had sufficient managerial power and authority since he was the company’s CEO, allowing him to decide on the degree of internal management and financial reporting. On the other side, having all of the critical participants be members of Madoff’s family weakened the overall corporate structure of the Madoff firm. The principal compliance officer was his brother. The head of administration was his nephew. Directors were his sons. The lawyer and regulations compliance attorney was his niece (Williams, 2017). Similar to this, Madoff was made non-executive chairman of NASDAQ, a position that earned him a great deal of respect and confidence both from investors and authorities (Williams, 2017). He could carry out any strategy in this situation without being questioned. Madoff was in a better position to spend all of these assets as per his option when he gained the trust of shareholders, and they began to invest or provide funds.
Now let us talk about the third component, rationalization. The purpose of rationalization is to provide a defense for fraudulent behavior (Williams, 2017). First, Bernie and his accomplices justified the deception by warning prospective investors who approached him for financial investment. The notice that investing carries risk and can result in losses was sufficient to obtain approval to add further funds to the plan (Williams, 2017). The third factor is that Madoff’s ultimate objective was to attain financial success. He justified his actions by working in his and his family’s best interests, regardless of the person buying. Furthermore, Madoff claimed that “it was their responsibility for believing me” because not all investors were taken advantage of by his hedge fund, and those who lost money were those who joined the system at the final minute. Similar to this, Madoff attempted to defend his deceptive actions by convincing himself that the economy was fixed and that if he had not done it, others would have.
In reality, there was never any genuine investment in the stock market, client money was never subjected to price fluctuations, and account statements were never related to the American stock market. The $65 billion financial loss caused by Bernie Madoff’s fraud paid off for the offenders, their relatives, and their associates, and many other individuals became wealthy due to the long-running crime (Williams, 2017, p. 98). This fraud rendered retirement money, children’s trust funds, and pension monies useless. Millions of dollars in pledged or continuing gifts have to be canceled by charitable groups (Williams, 2017). Many workers lost their jobs, and millions of people’s trust were damaged. It is also true that Madoff was imprisoned. In this situation, financial and non-financial losses could have been avoided (reduced or eliminated) if the Securities and Exchange Commission (SEC) had listened and taken the necessary steps. However, the short-staffed and poorly funded SEC, which also got a record 13,599 complaints in 2000, decided not to open an investigation into his complaint (Williams, 2017, p. 99). At a meeting in the SEC’s Boston office, Markopolos presented his findings from the 2000 complaint and urged the agency to look into Madoff.
Markopolos and an SEC staff accountant testified in court that it was evident following the meeting that the SEC’s Boston District Office’s deputy district administrator did not comprehend the facts. According to the results of our study, the BDO’s decision not to investigate Markopolos’ complaint or even report it to the SEC’s Northeast Regional Office (NERO) was most likely motivated by this (Williams, 2017). Another intriguing fact is that, in most of the SEC investigations, the company dispatched junior agents to confirm Madoff’s earnings and the legality of his business dealings. Senior SEC officials did not directly attempt to sway examinations or inquests of Madoff or the Madoff firm. There was no evidence that any high-ranking SEC representative impeded the staff’s potential to do its job. This demonstrates that the SEC had no part in exposing the Ponzi scheme run by Bernard Madoff. Suppose the SEC had paid attention when Harry Markopolos initially told them about his concerns. The actions of Madoff would cease, as he did for four years, such as depositing $21 million into Ruth’s account to cover her luxury yacht and shopping excursions in Paris. Bernie’s brother Peter bought his daughter a pricey weekend property in the Hamptons, and Bernie’s sons bought a company that made fly-fishing gear, a pastime they both liked (Williams, 2017). These things would never have happened, and the stockholders would never have lost their money.
All regulatory bodies learned essential lessons from the Ponzi scheme run by Madoff. The principal regulatory authority, the SEC, disregarded many accusations against Madoff and encouraged Madoff to dream large, undoubtedly learning a valuable lesson from this fraud. The SEC might have played a significant role in preventing the Fraud scheme or could have reduced losses if they had taken adequate action. They redesigned how they handled complaints and tips after the Madoff scandal. The SEC established a unified information technology system for monitoring, evaluating, and reporting on the treatment of tips and complaints. In order to be more active in spotting fraud, the agency is also developing a potential system to use data science to this information.
Reference
Williams, D. C. (2017). A timeline and Fraud Triangle analysis of the SEC’s Madoff Ponzi scheme investigation. International Journal of Business and Public Administration, 14(1), 98–105. Web.