Case #1 – Madoff
Case #1 – Madoff
Background of the Madoff Securities Failure
The Madoff Securities Scandal was discovered in 2008 when the chief operator Bernard Madoff confessed to his sons that the investment vehicle was actually a well-calculated Ponzi scheme. The Ponzi scheme collapsed mainly due to the economic downturn of 2008, which caused investors to wish to withdraw their funds from the scheme (justice.gov, 2015, n.p). The major challenge was that the Madoff Securities coffers contained about 200 to 300 million dollars whereas the money the investors wished to withdraw was amounting to over 7 billion dollars.
David Friehling was the accountant for the Investment vehicle who produced fraudulent documents such as false audit reports that Madoff used to show investors in order to give them the impression that the business was in fact legitimate and highly profitable. Friehling helped Madoff to conceal the Ponzi scheme to attract more investors (Coyne, 2015, n.p). His role as the accountant included filing false documents to the Securities and Exchange Commission (SEC), lack of auditing the firm throughout the period of accounting spanning almost two decades, giving false accounts of the funding and financial status of the firm and curbing the operations of the Internal Revenue Service (yang, 2015, n.p). He later obtained leniency after he agreed to act as a federal witness and co-operate with the authorities.
AICPA’s Code of Professional Conduct
The American Institute of Certified Public Accountants (AICPA) code of conduct is a list of statements, which explain the ethics, and responsibilities that a certified public accountant must assume. Lack of disclosing all potential conflicts of interest between the investor and the promoter constitutes to investment fraud according to the AICPA code of conduct. In the Investment advisor act, the sole responsibility of full disclosure to ensure prevention of fraud and financial harm to either party lies on the investment advisor. Friehling participated in not only concealing the detailed operations of the business but also in encouraged more individuals to invest their funds in a bid to sustain the Ponzi scheme.
The investment advisor is also required to file an audit report of a business to the SEC without eliminating or concealing any details that may present a conflict of interest. David Frehling failed to carry out an audit report on the firm and instead doctored the results, which he presented to the SEC (Carroll, 2006, n.p). In turn, he received a monthly fee of around 14,000 dollars from Bernard Madoff for the services. Section 206 of the investment advisors act of 1940 prohibits any investment advisor to act on behalf of a broker or investor who operates a fraudulent scheme. David Frehling acted as the accounting representative of the Bernard Madoff Ponzi scheme. Friehling was in total charged with one count of securities fraud, investment advisor fraud, and doctored results, which he presented to the SEC.
The above charges that Frehling was convicted of were an illustration of the consequences of aiding and abetting in fraudulent financial schemes (Sterngold, 2015, n.p). The victims of the fraud amounted to more than 50,000 individuals, with a very small percentage receiving the amount that was invested. Thus, the legal action taken by the SEC was due to his negligence to carry out legal audits on the firm. In addition to this, the reports that he presented to the investors deceived them into thinking the scheme was a legitimate operation that generated more that 50% in profits in a span of 90 days.
Carroll, Brian. ‘How to Prevent Investment Adviser Fraud’. Journal of Accountancy. N.P., 2006. Web. 17 Sept. 2015.
Coyne, Matt. ‘David Friehling, Bernard Madoff’s New City Accountant, Finally Sentenced’. lohud.com. N.P., 2015.
Justice.gov. ‘United States V. David G. Friehling | USAO-SDNY | Department Of Justice’. N.P., 2015. Web.
Sterngold, James. ‘Madoff Accountant Gets Light Sentence’. WSJ. N.P., 2015.
Yang, Stephanie. ‘5 Years Ago Bernie Madoff Was Sentenced To 150 Years In Prison – Here is How His Scheme Worked’. Business Insider. N.P., 2015.
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