Ponzi Schemes And The Madoff Scandal Accounting Essay

About every other twenty-four hours, the newspaper alarms us with another dirt gone incorrect with ethical lines. May it be Tyco, WorldCom and the large dirt of Enron, the economic system and stakeholders are to endure. Therefore, concern moralss has evolved into a major topic over the past few decennaries. ( ANY JOURNAL ) This essay narrates a corporate dirt that was based around the ties of a Ponzi strategy. Bernard Madoff is known to be the executor of the most deceitful and fallacious strategy in history, for which he was sentenced for 150 old ages. The debut defines a Ponzi strategy, its properties, beginning, and introduces Bernard Madoff.

“ Rob-Peter-to-Pay-Paul ”

A Ponzi strategy, frequently related to pyramid strategies, is a fraudulent set up where current investors are paid by the money invested by the undermentioned investors. More frequently than non, there is n’t a legitimate net income earned by the Ponzi plotter but a rhythm that revolves money in the targeted market. In order to pull farther investors, the strategy normally tends to return high per centums of net income and hence grows rather quickly. ( Shruti – Mathematicss of Ponzi strategies )

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Permiting the operator ‘s imaginativeness, the nature of prosecuting investors to give money can lie from investings in stocks to investings in existent estate. The types of depositors enticed into the strategy are normally targeted and can differ in nature of their faith, professions or members of a common group. ( hypertext transfer protocol: //www.imf.org/external/pubs/ft/wp/2009/wp0995.pdf ) . Technically talking, there are two types of Ponzi strategies, one which is intended as a fraud and another in which a right company turns itself into playing the dirty fast ones of a Ponzi trade. ( hypertext transfer protocol: //www.mathonconservatorship.com/documentsCnsrvtr_2nd_Rpt_9_30_05.pdf )

As the strategy promotes itself, it sooner or later grows widespread among communities, which could alarm the governments of such a fraud and concern jurisprudence comes into topographic point. Typically, there comes such a first-come-first-serve period in which the figure of investors are excessively much to manage or new investors do non come in the strategy and the strategy collapses, it is inevitable. At this concluding phase of the strategy, the recent investors are the one to endure as most early investors and the operator would hold made high borders of net income. ( hypertext transfer protocol: //web.ebscohost.com/ehost/pdfviewer/pdfviewer? vid=1 & A ; hid=107 & A ; sid=81af978d-3153-489b-9b5e-026f45e0726c @ sessionmgr110 )

Usual manoeuvres of Ponzi Schemes

Ponzi strategies go around the shrub for so long and for so many by offering great returns on investing. Another psychological factor “ Social Consensus Tactic ” in which the operator pays off the initial investors with great net incomes which provides cogent evidence and belief in other doubted investors and therefore spread outing the concern. After the initial set up, ponzi plotters do non accept everyone and anyone. Therefore, by non advancing the strategy, word of oral cavity comes in ready to hand and the concern appears to be sole to some. This semblance makes the investors align with the strategy as they would fear to lose out on a opportunity of deriving high net incomes. hypertext transfer protocol: //www.lfblaw.com/ANM2.pdf

How it all started?

Ponzi strategy is named after the royal poinciana and ill-famed Charles Ponzi, who in 1920s gave true visible radiation to such a strategy. Through high returns ( 50 % for 45 yearss ) , of provisioning foreign postal casts, Charles Ponzi attracted and was approached by many. He claimed the returns by the rate difference in providing international postal casts in US. ( Sibeesh – ssnr02939999 ) He masterminded the techniques of such a accomplishment, in which he would pay the first investors with their high net income returns through the money gathered by the incoming investors. The existent success to Charles was the of all time spread outing list of investors and concerns and hence went out of the targeted market and was excessively much to get by up with. ( hypertext transfer protocol: //proquest.umi.com/pqdweb? index=8 & A ; did=1621875211 & A ; SrchMode=2 & A ; sid=1 & A ; Fmt=3 & A ; VInst=PROD & A ; VType=PQD & A ; RQT=309 & A ; VName=PQD & A ; TS=1271841411 & A ; clientId=67651 )

As the word spread about the legal issues sing Ponzi ‘s dealing, betrayed and heated investors rushed through the doors of Charles office to which he could n’t keep long and was confined. ( SIBEESH – PYRIMAD 11 )

Bernard Madoff

Bernard Madoff, a fiscal mastermind, born on April 29, 1938, graduated from Hofstra in the field of political scientific discipline. Madoff subsequently decided to get the hang the topic of jurisprudence but dropped out to open his ain investing company in 1960, Bernard L. Madoff Investment Securities, L.L.C.

Madoff ‘s Company

Through keen human accomplishments and through beginnings of Madoffs male parent in jurisprudence, Madoffs concern developed into a reputed investing company. The company challenged the straightforward modus operandis of the bing agents. Madoff ‘s house kept making good due its engagement in the stock market and in 1970 Madoff decided to engage his household members and close friends to fall in him in the extremum of his concern universe. Having completed their alumnus surveies, Madoff ‘s boies Andrew and Mark, both joined in to assist boom the household concern. hypertext transfer protocol: //business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5344752.ece.It was n’t long before the company made drastic alterations, by assisting NASD builds a plan to develop stock quotation marks, NASDAQ program/system ( National Association of Securities Dealers Automated Quotations ) , for which Madoff functioned as the president of the boards of managers. With dependable and consistent return on rule ( 10 % ) , the company reached bigger and better highs to a point where in 1980s, Madoffs house dealt with 5 % of the Stock exchange market. Madoff built his contact list, through a really magnetic personality and through lending to the Judaic charity organisations and several other foundations. hypertext transfer protocol: //business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5344752.ece

MAIN BODY -The dirt ‘s relation to Ethical Theories

In this subdivision, the essay goes farther declaiming the biggest dirt yet witnessed and is so linked to several ethical theories to compare and contrast Reality Vs Theory state of affairss.

“ How make you pardon bewraying 1000s of investors who entrusted me with their life nest eggs? ” – Bernard Madoff. hypertext transfer protocol: //www.nydailynews.com/money/2009/06/29/2009-06-29_text_of_bernie_madoffs_statement.html

Investors were made to believe that their money was applied by Madoff in high reaping investings, when the truth was that there were no investings and decidedly no net incomes. Madoff used the old dirty fast one of a Ponzi strategy in which he used the invested money to pay off clients who backed off. Due to repute of dependable returns the house became the stock markets most high-flying investing companies. Therefore, this helped Madoff to revolve the money in the economic system.

hypertext transfer protocol: //www.independent.co.uk/news/business/analysis-and-features/the-madoff-files-the-man-behind-the-most-audacious-fraud-in-history-1518939.html

Theory Vs Reality

Madoff applied the Planned behaviour theory which focuses more on the fact that human existences can command their behaviour whereas the theory of ground does non. The theory is based on 3 chief indexs ; attitudes toward the behaviour, societal norms and perceived control, and these are all influenced by one factor ; purposes. Related to the theory, Madoff ‘s attitude was manner positive for executing false activities for so long. He had gained adequate power and control of the state of affairs by perfect executing and contacts that an unethical concern was made easier to acquire off. Madoff ‘s purposes to play such strategy were preplanned, nonsubjective and therefore, behaviour was in confederation with the terminals.

Bloomberg testified that Madoff ‘s investing company was situated on the 17th, 18th and 19th floor. The 18th and 19th floors were complete different divisions which handled the market services and legitimate trading of the company. hypertext transfer protocol: //business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5345751.ece.

Theory Vs Reality

Associating Madoff ‘s dirt to Agency theory which states that directors or operators can sometimes move in a self-interest manner, therefore they do n’t ever follow a civilization to maximise stockholders returns. ( 1 ) Agency theory is described to incorporate 3 function participants, one the rule ( operator ) , agent ( hired by the operator to help in 3rd party relationships ) and a 3rd party through which the principal might cover with to gain net incomes. ( 2 ) As mentioned by some visitants to the seventeenth floor, it was an office chock-full of computing machines and notes on fiscal minutess. It was here where Madoff ‘s deceitful activities took into full charge, the bosom to a multimillion dollor fund, merely run by 20 employees. hypertext transfer protocol: //www.independent.co.uk/news/business/analysis-and-features/the-madoff-files-the-man-behind-the-most-audacious-fraud-in-history-1518939.html The theory helps happen a common terminal between directors ‘ determinations and the involvement of the stockholders by presenting public presentation based incentive plans. With all kineticss, bureau theory can sometimes take directors to be self-centeredness which could take to unethical behaviour and therefore an unethical civilization. ( 1 ) . Madoff ‘s program was based and centered among these 20 ought employees, who were paid highly high with excess fillips and inducements.

There was a immense web of fundraisers who really helped Madoff in go throughing him billion dollars of hard currency from their familiarities. Unaware that they were stepping into a con strategy, Madoff planned to gain higher net incomes, through commissioning these jobbers for the subcontracted concern they bought to him. He made them falsely believe that the money would harvest net incomes through investings and the bonds would raise their value faithfully shortly It all started with Carl Shapiro, who received the first check of $ 100,000 from Madoff himself. Along the concern lines, Shapiro and Madoff got along, in which Shapiro was improbably impressed by Madoff ‘s investing schemes and hence, directed his familiarities to Madoff. The list of confederates goes on, including Scotsman Donald Ross, Ezra Merkin ( Member of New York ‘s Jewish community ) , Walter Noeal and many more that followed the same thought, therefore assisting Madoff win in his deceitful venture. By this clip, Madoff was extremely reputed, and had investors runing from famous persons to entrepreneurs. Some of the famous persons that have invested their money with Madoff are Kevin Bacon ( Actor ) , John Denver ( Musician ) John Malkovich.

Theory Vs Reality

One of the legal responsibility of board members is of the fiducial responsibilities. It is when legal or ethical relationships of assurance or trust between two or more parties are created. The general nature of these responsibilities includes personal involvement, and the fact that person should non take personal advantage of their place of trust. hypertext transfer protocol: //www.gillhams.com/dictionary/497.cfm. Madoff ‘s confederates put themselves in state of affairss where their opportunism ( committees ) was in direct struggle with the moral responsibilities of the occupation. Hence, acquiring benefits of such an act but at the same clip, put on the lining trueness and rules of their organisation, these confederates joined custodies in Madoff ‘s trade.

“ You can gull some of the people all of the clip, and all of the people some of the clip, but you can non gull all of the people all of the clip. ” Abraham Lincoln.

It was ever traveling to be difficult to swear Madoff ‘s tactics of systematically returning investors high rates of net income. Harry Marcopolos, a math originator, while working in an investing house based in Boston suspected Madoff ‘s scheme. Marcopolos could n’t believe that the executing was legitimate and therefore wanted to check the codification. After intense research, Marcopolos was unable to calculate out how Madoff was able to vouch a profitable return to his investors.

Jumping to decisions, Marcopolos assumed that either Madoff was utilizing agencies of an illegal accounting fast one, “ Front running ” ( A stockbroker fast one in which the monetary value of a portion is increased by wagering a higher monetary value on the bond ) . Or that Madoffs ‘ house is nil but the universe ‘s largest ponzi strategy. When Marcopolos decided to inform the governments ( US Securities and Exchange Commission SEC ) , they acted rather nescient towards the issue. During the following few old ages, Marcopolos would would still run to uncover the secrets behind Madoff ‘s scheme. He spent clip assemblage facts and figures and he invariably sent them to the SEC hoping to win a wages.

Theory Vs Reality

Whistle blowing concerns the coverage of unethical or even illegal activities to person who has the place to take action, or even to forestall the incorrect making. ( Ethics text book, p.128 ) . It includes incorrect making with internal every bit good as external parties. ( 13 ) It can frequently expose and even stop unethical activities which may be taking topographic point in the business.Harry Marcopolos was known as the whistle blower who pointed out Madoff ‘s ponzi strategy for several old ages to the SEC research workers. ( 13 )

Marcopolos realized that there was something leery about Madoff ‘s accounting books, it turned out that Madoff used a one-man audit house, Friehling & A ; Horowitz. This was a really little house based on the outskirts of New York, making uncertainties of how such a house could scrutinize a concern deserving 1000000s of dollars. Madoff ‘s investors excessively speculated that returns might hold been false ; nevertheless they still continued puting due to greed. At this point of clip, there was a farther in-depth probe on Madoff ‘s run, in which it was eventually discovered that Madoff was intentionally seeking to cover his company ‘s profile from the remainder of the universe, giving an semblance that investors were perforating through a rightful way. However, the governments did non convey this affair to the consciousness of the populace.

Theory Vs Reality

The moralss jurisprudence imposes three responsibilities on board members. These consist of the responsibility of attention, good religion and trueness.

The responsibility of attention involves the board members to vouch that the corporate executives carry out their direction duties every bit good as following with the jurisprudence in the best possible manner, in the Madoff ‘s instance SEC were excessively easy traveling and ignoring. It helped Madoff flight on first bloom, which has proved costly.A ( Ethics text book, 430 ) . The responsibility of trueness expects the organisation to give full committedness when doing determinations which affect the organisation in any possible manner. Faithfulness is critical in the responsibility of trueness. Hence, through farther readings, it was identifiable that SEC regulators overlooked the possibility of fraud in Madoff ‘s concern early on, therefore set uping the organisation. ( Ethics text book, 431 )


Through an earning direction and CSR point of position, Madoff made high net incomes ( net incomes ) and hence attracted many, but Madoff besides had an insolvent balance sheet. ( Liabilities & gt ; Assetss ) . Decidedly, there was usage of originative accounting in which accounting houses tend to pull strings their fiscal information in a determined manner to the public position. This method used by insiders of transforming fiscal equations in favour of the concern is known as net incomes direction. Madoff ‘s manner of gaining net incomes and get awaying from governments was based on such direction accomplishments and hence, the company in general was n’t really socially responsible, towards the economic system or stakeholders but at the same smoothing the net incomes. ( 4 )

“ I ‘m non certain I ‘ll be able to keep it together ” – Bernard Madoff.

In 2008, crisis struck the economic system due to which, new investors were loath to give money into Madoff ‘s house.

Due to the prevalent economic status, it led investors retrieve money from Madoff ‘s house. Madoff had used that money for personal disbursals and to pay other investors along the manner. Madoff snapped and decided to beg money.

hypertext transfer protocol: //www.independent.co.uk/news/business/analysis-and-features/the-madoff-files-the-man-behind-the-most-audacious-fraud-in-history-1518939.html

By this clip, Madoff had to clear combined outstanding payments of $ 7bn to his clients. In fact, Madoff merely had a really little fraction of the outstanding sum and because he was confronting trouble beging the money, he decided to administer the remnant money to his employees, household and friends.

hypertext transfer protocol: //business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5345751.ece

Hence, Madoff rescheduled employee fillips earlier than the usual. Madoff ‘s boies Andrew and Mark, were surprised at this determination and demanded a justification of this unusual determination taken during the recognition crunch. Madoff confessed that the full concern was nil but a planned ponzi strategy, a large prevarication to acquire richer in the fastest but non the most pleasant manner. Andrew and Mark were both caught in the daze of such unethical occurrences and decided to alarm the legal governments. hypertext transfer protocol: //www.independent.co.uk/news/business/analysis-and-features/the-madoff-files-the-man-behind-the-most-audacious-fraud-in-history-1518939.html

Theory Vs Reality

We would rede that Andrew and Mark followed two ethical theories accordingly, Rawlsian ‘s Justice theory and virtuousness moralss. It was as if, they were behind the head covering of ignorance, wholly ignoring that Madoff was their male parent, overlooking all those other barriers such as the money, household promotion and future effects. They followed Rawlsian ‘s theory in which he states that a just determination is merely just if it is impartial. Both Andrew and Mark, made determinations on the footing of merely and fairness, non on nonpartisanship or feelings. ( hypertext transfer protocol: //www.emeraldinsight.com/Insight/viewPDF.jsp? contentType=Article & A ; Filename=html/Output/Published/EmeraldFullTextArticle/Pdf/0010460804.pdf ) Virtue moralss can be related to Madoff ‘s boies as their determinations bought about the well being of others and themselves as persons. Of class, faced in a moral quandary, Andrew and Mark both had character traits of those of honest, just, altruistic and honest people. ( ( http___www.emeraldinsight.com_Insight_ViewContentServlet_contentType=Article & A ; Filename=_published_emeraldfulltextarticle_pdf_0510130901 )


Bernard Madoff allegedly confessed in a courtroom full of disquieted citizens, that his balance sheet was insolvent and it had all been a concern in camouflage. Harmonizing to Madoff ‘s statements, the fraud began in 1990 and it was a good trade gone bad concern. Experts on the other manus intimation that the fraud may hold been into topographic point manner before, 1980s.

hypertext transfer protocol: //online.wsj.com/article/SB123685693449906551.html? mod=djemalertNEWS

Bernard estimated that his losingss in the market exceeded $ 50 billion, he was found guilty to runing 11 illegal classs of actions. Some of them being, Securities fraud, wire fraud, mail fraud, three illegal counts of money laundering, investing adviser fraud and wrong certification with the SEC. After the terminal of this, when Madoff was under apprehension, his house showed an outstanding sum of $ 65 billion in the books. Madoff ‘s fraud was declared to be the universe ‘s largest fraud and for that he was sentenced 150 old ages in gaol on June 29, 2009.

hypertext transfer protocol: //www.biography.com/articles/Bernard-Madoff-466366? part=0

Thousands of people were at interest and Bernard knew the effects of his actions. Stock Market, Brokers, Investors, communities, household and friends, even the economic system and authorities were affected due to such an happening. hypertext transfer protocol: //www.timesonline.co.uk/tol/news/wor ld/us_and_americas/article5331997.ece The Bernie Madoff fraud besides disturbed the fiscal services of some major Bankss Institutional clients who despaired to put in Madoff ‘s house, loaned money through these Bankss and Madoff ‘s fraud meant failure for investors to return the apt money back. Banks such as HSBC being the most affected ( $ 1bn ) , BNP Paribas, Banco Santandar, Royal bank of Scotland and more to advert were victims of Madoff ‘s venture. hypertext transfer protocol: //economictimes.indiatimes.com/News/International_Business/HSBC_worst_hit_of_Bernard_Madoffs_USD_50_bn_fraud_Report/articleshow/3841456.cms

Theory V. World

The shareholder theory refers to a group of people who invest their money into another group ( Business Managers ) to derive an increased net income on principal.. For the shareholder, directors themselves act as the agents, who are authorized to pull off the money given by the shareholders. ( 8 ) . The theory states that the directors actions with the financess invested should be in alliance with the waies notified by the shareholders. ( 8 ) In Madoff ‘s instance, he broke every tie of this theory by non puting money into ventures, as the shareholders directed but by utilizing it for personal disbursals and paying off net incomes of earlier investors, therefore passing the money for self-interested ends without mandate of the shareholders.

The stakeholder theory is a theoretical account of corporate societal duty. It shows that all directors have ethical duties within a company to their stakeholders. ( Ethics text book. Of class, concern has it that there are times when shareholders are given fondness over stakeholders.A A ( 8 ) . All the stakeholders were widely affected by Madoff ‘s actions as many people had invested their unrecorded nest eggs in his concern, which they ended up losing. Stakeholders in Madoff ‘s instance would be Bankss, economic system, indirect and direct communities such as the charitable Judaic communities etc who were extremely effected by Madoff ‘s actions. Therefore Madoff did non see the involvement of these stakeholders while doing concern opinions.

hypertext transfer protocol: //www.news.com.au/business/breaking-news/banks-face-billions-in-madoff-losses/story-e6frfkur-1111118329822

The societal contract theory claims that all concerns are ethically required to develop the well-being of its employees and the society in general, without traveling out of the bounds of jurisprudence. ( 8 ) It would be reasonably self-explanatory to reason this theory by Madoff ‘s actions, the self-interest and egocentric impression of his venture, intentionally put lives of many in problem. But besides the fact that he did what he did, by traveling against the jurisprudence proved him to be wholly against the societal contract theory.


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