Case 1.12:Madoff Securities

1276 words 6 pages
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.”
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The SAS 99 describes three conditions of fraud: incentives/pressures to commit fraud, opportunities that circumstances provide opportunities to commit, and attitudes/rationalizations which is an attitude, a character or set of ethical values exists that allows management or employees to commit dishonest act. Some of the fraud risk factors in Madoff Securities case include: Incentives/Pressures
Greenness- Madoff always wanted more. He wanted to maintain a rich lifestyle for him and his family, as well as to stay as one of the top investment firm. Opportunities
Madoff firm did not have proper monitoring controls as well as the ineffective accounting system, internal audit and information technology staff.
No one understood his strategy; no one could communicate with him about investments
SAS 99 requires the auditor to assess whether fraud risk factors exist. Fraud risk means that the likelihood of committing the fraud is high. For instance based on case some of fraud risk factors are:
• high degree of competition or market saturation, accompanied by declining margins.
• assets, liabilities, revenues, or expenses based on significant estimates


Other reforms recommended are for the victims of the