Custom «Review of Business Fraud» Essay Paper Sample

Review of Business Fraud

Fraud is the intentional concealment of truth for the purpose of manipulation or harm to a person or an organization. It is an act that involves cunning tactics with the aim of stealing from others of their resources. Major fraudulent activities can also cause injuries to the economy. This paper will talk about a fraudulent case involving a United States re-known business man, Bernard L. Madoff, and the 20-year Ponzi scheme. It is a case that saw him sentenced to 150 years in prison by a federal district court.

Bernard Madoff has founded the Bernard L. Madoff Investment Securities in the year 1960. In 1980s, his firm was one of the largest independent trading operations in the securities industry (The New York Times, 2012). The company assets amounted to approximately $300 million in 2000, and ranked among the top trading securities firms in the entire nation.

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Mr. Madoff promised the investors a high return for their investments, as much as 46 percent. This promise marketed him widely to well off investors, hedge funds and some other institutions. To sustain his fraud, Mr. Madoff organized ill-trained and inexperienced accounting officers and directed them to produce false and fraudulent documents. These staff members told lies and supplied false records to regulators (DeGrace, 2011). They went ahead and shuffled hundreds of millions of dollars among a number of banks to create a false active trading to deceive their clients. Furthermore, Mr. Madoff was found to have invested some of the Ponzi scheme money in a wholesale stock trading operation, a business where his brother and sons worked.

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The court had found him guilty of collecting Ponzi schemes money amounting to 250 million between 2002 and 2008 and directed it through a series of money transfer services to an account believed to fund the operation of these businesses. Frank Dipascali confessed that he was a close associate of Mr. Madoff for over 20 years, and had helped him a great deal in the carrying out the fraud (DeGrace, 2011). The two would use historical date stacks from internet in order to create fake trading blotters, send out false account statements to his customers and arranging for the transfer of funds between London and New York offices of Mr. Madoff’s, in order to make up an impression that the company was earning commission from the stock trades. By 2008, Madoff investor account statement was about $65 billion, as shown by fictional paper profits that had accumulated in some accounts. The total cash losses in the frauds estimated to be $20 billion.

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However, helpful Mr. Madoff seemed to be in the eyes of his clients, he was always driven by a spirit of greed and materialism. At an age of 70 years, he had acquired much wealth through fraudulent means, but still this was not enough for him, as he had other unscrupulous plans. He also went ahead to involve his family and relatives in this scam. As a matter of fact, he conned so many people, who at first entrusted him with money (DeGrace, 2011). He had over one thousand lawsuits seeking more than $100 billion in damages and fictional profit.

In addition to these traits, Madoff was a schemer. The plans of fraud were done using very tough tactics and calculated methods, and that’s why he survived for that long without anybody uncovering the crimes. Unluckily for him, he hired a courageous Frank DiPascali, who testified of Mr. Madoff’s acts of fraud without fear. On the other hand, Frank was gullible. He knew how serious this crime was and the repercussions, but still held on for 20 years, where Madoff enjoyed a large portion of this money (DeGrace, 2011). Not forgetting the corrupt auditor, David G. Friehling, who had tried to produce documents to show his innocence, but he did not pull through in this, as the professional document he produced in self defense just proved that he was Madoff’s associate in fraud.

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Mr. Madoff made individuals, such as Mr. Wilpon and Mr. Katz, lose a lot of money through the fictional profits he paid them. Other individuals included Elie Wiesel, Steven Spielberg among others. Several companies and other institutions crumbled due to this fraud. A good example is the destruction of the HSBC bank and BNP paribus. He caused disillusionment to others up to an extent of committing suicide. Mr. R Thierry was a victim after he died in his office when he realized he had lost $1.4 billion with Mr. Madoff (DeGrace, 2011).

This case arouses our interest on how to prevent it’s recur in future. However it is important for us to understand fraud better, in order to come up with control measures that can be adopted during the time of violation. First, the classification of fraud has to be known. In the above case, there are number of classifications that are available for the context (DeGrace, 2011). It can be classified primarily as fraud, due to financial misstatement, as Mr. Madoff used unrealistic methods to have the profits calculated and assigned virtual values. Primary classification can also touch on avoidance of expense obligation as Mr. Madoff was unwilling to incur cost in the schemes, but still wanted the large amount of profit from them (Vona, 2012). This fraud can also be classified based on the Indian Penal Code as misappropriation and criminal breach of trust. Madoff stole money from people who trusted him to an extent of entrusting him with large sums of money, not to forget about the banks which collapsed after their money had been misappropriated by Madoff investments.

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However, principles of internal control system should have been used as one control to this fraud. The board of directors of these companies ought to have utilized the internal control measures that would have unmasked Madoff earlier enough, hence harm would not have been inflicted on people at a high level. The two internal controls of threat should have been effective during the violation and include preventive and detective controls (Vona, 2012). The internal control is the one that generates standards for ethical and risk assessment. Risk assessment detects and analyses risk factors within an institution. The management then analyzes monitors and repairs risks. Control activities are the procedures and policies that are practiced when the management review channels of authorization and compares budget to the actual expenses. The management then performs unscheduled reviews on ledgers and account balances (Office of audit and compliance review, 2012 ).

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In the above case, it could have been easier to detect the fraud, since the companies did not have a single editor conducting the business on behalf of Madoff. Moreover, monitoring is supposed to be done on the internal control system and should be done at each level. This could have exposed the false profits as per the Madoff’s tactics of fraud is concerned.

Furthermore, another internal control can be used to prevent fraud in future (Ledgerwood, 2012 ) through corrective control. Madoff took an advantage of his client’s inexperience in computer technology. Computer security is supposed to be emphasized, since it poses another threat to the efforts done to curb the fraud. There has been hacking of business transaction, where the criminals can interfere with data confidential information without being unnoticed. Viruses can also be introduced to destroy legal documents; hence antivirus programs should always be installed in computers with these important details.

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To wrap up the whole bit, Mr. Madoff’s sentence is almost equivalent to life imprisonment. His sentence is enough warning to other like minded people who might be tempted to take part in related cases of fraud. He strongly deserved this sentence due to the consequences that greatly harmed the economy.

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