This is a PPT file used for auditing class presentation. Bernie Madoff organised of the biggest financial frauds and ran 65 billion worth Ponzi Scheme. This PPT was made by utilising the data in prior presentations, and several websites.

1. IntroductionMadoff
Securities
Case 1.11
1

2. Case explanation
Early life
Bernard L.Madoff
Securities & Career
Timeline
Case answers
Q1
Q2
Q&A
Auditing-related
points
Q3
Q4
Q5
2
Outline

3. Born in 1938 in NYC
Sets up Madoff Investment
Securities LLC in 1960
Early Life3
Middle-class neighbourhood
Enrolled in Alabama Univ.
Transferred to Hofstra Univ.
Graduated with POS
‘’Bernie wanted to be
rich; he dedicated his life
to it’’

4. Career Timeline4
1960
Ambitious beginning (1960)
❖ Bernard L. Madoff Investment Securities was established
❖ Trading securities of only small companies aka ‘’Penny Stocks’’
❖ Pursuing the ultimate goal of becoming a major Wall Street
player

5. Career Timeline5
1962
Expansion (1962)
❖ Expanded significantly through offering investment advisory
services
❖ Investment advisory services became most important part of
its business

6. Career Timeline6
2001
Professional Scepticism (2001)
❖ Madoff disclosed minimum amount of information; the only
information he gave was that he used “split-strike conversion’’
strategy
❖ Since his strategy could not be duplicated, it caused immense
scepticism

7. Career Timeline7
1990
2005
‘’No One would listen’’(1999-2005)
❖Harry Markopolos repeatedly warned SEC referring to Madoff
Securities as the ‘’world’s largest Ponzi scheme’’
❖ In 2000, he submits SEC an 8 page memo, but SEC does not
further investigate into the matter
❖ In 2005, he provides SEC with a lengthy report pointing out 29
specific ‘’red flags’’

8. Red Flags8
❖ Madoff refused to allow Big Four Audits to review his financial
records
❖ Madoff securities was audited by a one-person accounting firm
(Friehling & Horowitz)
❖ Despite his prominent leadership role in NASDAQ electronic
stock exchange, he only provided monthly account reports by
mail
❖ Split-strike conversion strategy would require a lot more volume
for it to generate the claimed return

9. Career Timeline9
2008
2009
‘’Dark days’’(2008-2009)
❖ Dec.10, 2008, Madoff confessed to his two sons that earnings
for his investment advisory division was fraudulent
❖ Following day, he was arrested by FBI
❖ In June 2009, he was sentenced to 150 years in prison, he said
there was no innocent explanation for what he did

10. 10 Rubber-stamped statements
Auditor: Friehling & Horowitz
❖ David Friehling had issued unqualified
opinions on the financial statements
❖ AICPA had been reported that Friehling
did not perform any audits, so no peer
review programme was required
❖ David Friehling’s family had another 17
accounts with Madoff and 15million
investment in Madoff

11. 11 Rubber-stamped statements

12. 11 Answer 1
Q.1 Research recent developments involving this case
● As of March 4th, 2016, total investments of $17.5 billion remained
unpaid to investors. Irving Picard, the head of bankruptcy lawyers
was able to collect $11 billion
● Bernie Madoff revealed to have a heart attack and is currently
suffering from stage 4 cancer in prison
● Ruth Madoff, a wife of Bernie Madoff, cut off contact with her
husband
● Madoff’s eldest son, Mark Madoff committed a suicide in 2010
● Younger son, Andrew died of lymphoma
● His brother Peter Madoff, is serving a ten year sentence

13. 11 Answer 2
● The nature and amount of assets, liabilities, and transactions
executed
● The materiality of investment
● The specific risks that presents a reasonable possibility of material
misstatements to the company's consolidated financial
statements
Q.2 Suppose that a large investment firm had approximately
10% of its total assets invested in funds managed by Madoff
securities. What audit procedures should the investment firm’s
independent auditors have applied to those assets?

14. 11 Answer 2 (Detailed)
● 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 guide the
investment firm’s financial decisions.

15. 11 Answer 2 (Detailed)
● Furthermore,the independent auditors should conduct banking
reconciliations on all operative accounts. This audit procedure will
establish the actual bank balances held and reveal any
discrepancies in the accounts presented.

16. 11 Answer 3
● Peer review is a periodic outside review, performed by another
accounting firm, of a firm’s quality control system in accounting
and/or auditing services performed by firms. Peer reviews are
required of all firms that are member of the American Institute of
CPS.
Then why wasn’t it peer-reviewed?
★ At that time, New York was one of the states that did not require
PRP (peer review program)
★ Friehling & Horowitz was enrolled in the PRP but hadn’t submitted
application to review
Q.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?

17. 11 Answer 3
❖ A peer review would have detected Madoff’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.
❖ Banking reconciliations would have revealed check kiting and
established the actual amounts held by the company in various
banks. Comparing the firm’s payouts with that of similar firms in the
industry would have identified a major disparity that required further
investigation. Based on investigative reports, evidence would have
emerged showing that Madoff’s firm engaged in illegal practices.

18. 11 Answer 4
Q.4 Briefly explain the difference between a fraud ‘’condition’’
and ‘’fraud risk factor’’ and provide examples for each
Fraud
conditions
RationalisationIncentive
Opportunity

19. 11 Answer 4
Q.4 Briefly explain the difference between a fraud ‘’condition’’
and ‘’fraud risk factor’’ and provide examples for each
Fraud risk factors:
● Emphasis on meeting goals
● Client operates in a highly competitive industry
● Experiencing negative cash flows

20. 11 Answer 5
Q.5 Recommend other financial reporting and auditing-related
reforms that would likely be effective in preventing or detecting
frauds similar to that perpetrated by Madoff.
● Continuous education for employees
● Improving annual reviews of investment advisers and their work
● Improving public disclosure of the firm’s auditor for transparency
● Recruiting staff with specialised experience, competitive pay ( at
SEC)

21. 11 References
● http://www.dailymail.co.uk/news/article-2544071/Bernie-Madoff-
heart-attack-suffering-stage-4-cancer.html
● http://time.com/3626632/madoff-where-are-they-now/
● https://www.coursehero.com/file/p5ijhv2/2-Madoff-founded-
Madoff-Securities-which-was-one-of-the-first-brokerage-firms/
● https://prezi.com/uunvkbky5_0j/madoff-securities/
● https://www.quora.com/How-has-Irving-Picard-the-trustee-for-
the-Bernie-Madoff-liquidation-managed-to-collect-so-much-
money

22. Thank you for listening
21