Knapp Case Ch 2 Madoff Securities PDF

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Download Knapp Case Ch 2 Madoff Securities PDF

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1. Research recent developments involving this case. Summarize these developments in a bullet format. 

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On December 11, 2010, Mark Madoff, Bernie’s older son committed suicide. Andrew Madoff, the younger son died of lymphoma. And the wife of Bernie cut off all ties with him. Peter Madoff, Bernie’s brother and at the same time the Chief Compliance Officer, pleaded guilty and serving 10 years in prison. 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. By early 2016, Irving Picard, the trustee in charged with recovering the billions of dollars stolen or misused by Madoff, had filed more than 1,000 civil lawsuits against a wide range of defendants. To date, he has recouped more than $11 billion of the losses suffered by Madoff investors. Bernie Madoff says that he is dying from kidney disease, and is seeking an early release from prison.

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?  The auditor should know the industry and the nature of business of its clients in order to have a proper assessment of the risks involved. This will also help him in obtaining the evidenced needed to achieve the audit objectives and express an audit opinion. The independent auditors should properly look into the inherent and control risk of the company and ensure that the detection risk should be kept low. He/she should also look at the accuracy of each transactions between the firm and the issues about materiality. He/she should test the internal controls of the firm to see if it is effective and consistent in its implementation. Also, the auditor could perform bank reconciliations to confirm the account balances. 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? A peer review is the evaluation of work, performed by another accounting firm, of a firm’s quality control. It is to prevent firms from issuing irrelevant findings and opinions and to monitor an accounting firm’s accounting and audit practices. A peer review of Frieshling & Horowitz would result in the discovery of the Madoff fraud because the firm doing the peer review would be able to raise concerns of Frieshling & Horowitz capabilities in doing the audit work for the Madoff Securities. 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?

The three conditions of fraud is (1) the incentives, which is the reason to commit fraud, (2) the opportunity which the the internal control weaknesses that made the fraud possible and lastly (3) the rationalization which is the mindset that reasons out why the fraud was committed. Fraud conditions are instances that actually is present in the fraud, on the other hand, fraud risk factors are signs or warnings that fraud may exist. fraud risk factors are: •high degree of competition or market saturation, accompanied by declining margins. assets, liabilities, revenues, or expenses based on significant estimates Incentives: Madoff’s incentive of doing the fraud is that he wanted to be rich and be a big player in the finance world. Opportunity: Madoff firm did not have a proper monitoring systema and they have an ineffective accounting system. Rationalization: It was however difficult for outsiders to pinpoint Madoff’s rationalization in committing the fraud. 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. Other reforms would be on the side of the investors which is that she should have a critical mind, think and conduct research on the firm that they will put their money in. The investors should also not let their greed get ahead of them and quickly invest in firms that offers high returns that are too good to be true. Regulators should also have their share of reforms. They should establish stricter policies and be able to implement this fully. Policies on peer reviews should also be reformed to avoid situations just like the Madoff case....