Business: Bernard Madoff - Essay Example

?. Introduction Bernard Madoff admitted on March 12 2009 that he was guilty to an eleven count of unlawful charges. He was charged with infringementsof the 1933 securities act, 1934 securities exchange act, and the 1940’s investment advisers act anti-fraud provisions (Siegel 112). Madoff confessed during his hearing that he had been greatly involved in defraud and several investors had fallen victims. Madoff was given a life sentence of 150 years on June 29 2009. Earlier in 1960, Madoff established an investment firm that was known as Bernard Madoff investment securities, LLC. It was among the largest trading firms at that time and its focus was mainly to manage investment, to advice and to manage billions in assets. Madoff became famous and he managed to win the trust of several wealthy individuals. The revelations of the ongoing scheme came after the market crashed and people demanded their money back. It then appeared that the Madoff firm’s asset management arm was a Ponzi scheme. He had not made any investment on the money received from investors rather; he had deposited in different banks. When the investors wanted money from their accounts, Madoff would pay them using the interest and the principal. It became difficult for Madoff to make proper profits in 2007 when the market crashed. He told his sons what had happened and they contacted the FBI. Madoff admitted to having been involved in the illegal scheme that consisted of false trading, unlawful foreign transfers and untruthful SEC filings (Kotz 126). According to him, his major aim was to meet his client’s demands of high returns that he could not fulfill legally. Bernard Madoff was involved in various unethical issues in different levels that include individual, organizational and societal (Ferrell et. al 101). On the individual level, Madoff became dishonest to several investors both the prospective and the current for his own personal benefit. He made false promises to them that their returns would be consistent. He conducted his investment firm illegally hence, disappointing his clients and himself in the end. It was also unethical for Madoff to send manipulated returns to different investors with regard to their investment. The investors were not aware that their expectations would not be met. Still on the individual level, Madoff also, did not disclose any information to his family, employees and friends. His dishonesty negatively affected the lives of several individuals. On the organizational level, he gave out information that was false to the regulators who were monitoring his firm. It was impossible for them to realize the scheme even when individuals raised concern regarding Madoff’s activities. Madoff’s action resulted in failure in his business together with other businesses that had direct links with his. The survival of most of these of firms was short-lived because of the scandal that Madoff got involved in. On societal level, Madoff made donations to various charities, non-profits and educational institutions. In return, some of these institutions made several investments in Madoff’s firm. Later, most of these charities and the non-profits organization collapsed since they were not able to conduct the work that they were established to do. The Ponzi scheme also had a negative impact on the perception of the society regarding investment on different businesses. Therefore, for the society in general, they will remain doubtful and lose trust with different businesses regarding their investment. In order to win back the society’s trust and even respect for investment businesses, great effort will have to be in place. Historically Madoff Ponzi scheme has been perceived as being the largest criminal plot. It is estimated that the total costs incurred by the clients is $65 billion. While he will be detained for life, authorities are still trying to figure out what could have happened to the whole amount. Madoff has been termed as being greedy and that he almost ruined the financial system of the whole nation. A Ponzi scheme is mainly an investment fraud where existing investors are paid purported returns from funds received from the new investor’s contribution. Despite the admission by Madoff that he solely conducted the operations that are termed to be large scale, several individuals must have been greatly involved. An attorney, Harry Susman who was representing most victims of scheme asserted that Madoff could not conduct the whole firm alone. Reports had to be presented regarding the returns, other individuals had to deal with stocks buying and selling, and still others forgery and reports filing. For Madoff to have carried out the scheme alone he would have been forced to work for more hours. It would not have been possible for him to have holidays or even time off. He would have had to nurture the scheme on a daily basis. Several questions include how his clients managed to access their money when he was away. When argued in an administrative view, several people must have been involved considering that the statements of accounts had to be compiled together to portray the existence of trading activity. In addition, different personnel must have been concerned including those with proper knowledge of the traded securities market prices. Accountants also must have been involved to ensure that both the internal documents and those sent to various clients reconciled. When auditors from big firms are paid large amount of money annually, it may result in conflict of interest. They will compromise their work for them to be able to please their clients. In most cases, they assume that the existing small irregularities will be amended in the next phase. In Bernard Madoff’s case, a small accounting firm certified the company’s books. Considering the size of the firm, the small accounting firm may have lack the appropriate bargaining power hence; they might have opted to ignore the existing discrepancies in the financial statements. This could have been the case in order to enable the largest client to enjoy its services. Several steps can be taken to prevent frauds similar to that of Madoff. The accounting firm’s incentives have to be properly put in place to lessen the existing conflicts of interest. As a requirement, every institution that deals with investors should renew their auditor after a certain period of five years. When the existing contract between a firm and an auditor ends, an organization will have to choose a different one from the auditing agencies. The new system will play a significant role in that it creates efficiency in the matches between the auditor and the firm. Through this system, the company and the firm incentives balance correctly. Considering that different accounting firms replaces the existing auditor, every accounting firm will take their jobs seriously since they possess strong incentives. The new system is perceived to be self-regulatory because it is able to monitor itself without necessarily requiring intervention from the government. In case a new auditor realizes inconsistency on the past audited statements, government assistance will be necessary. Through the new system, the auditors will be keen on the accounting principles that are accepted generally because of the existence of incentives. These principles help auditors to maintain their reputation and even reduce the probability of siding with managers who conduct themselves in an unethical manner. Conclusion Bernard Madoff ruined his large investment firm into one of the largest Ponzi scheme in history. He was involved in several cases of fraud that ruined several investors’ lives. Later when the fraud was uncovered, Madoff was convicted for eleven accounts of unlawful activities and sentenced for 150 years. Madoff decisions in business were not ethical. He opted to ruin the lives of several investors for his own benefit. Madoff could have used other alternatives that were mainly established on moral principles. His involvement with the charities and non-profits caused excessive damages. There is a possibility that the society in general will be more discerning when making crucial decisions on whether to trust or not individuals in business with high profile. Madoff scheme instituted suspicion and disbelief among most individuals and businesses. Sources Ferrell,O. C. , John Fraedrich, Linda Ferrell. Business Ethics: Ethical Decision Making and Cases. USA: Cengage Learning, 2010. Kotz, H. David.Report of Investigation of Failure of the SEC to Uncover Bernard Madoff's Ponzi Scheme: Executive. USA: DIANE Publishing, 2010. Shiller, Robert. “Irrational Exuberance”, Princeton University Press, 2005. Siegel, Larry J. Criminology. USA: Cengage Learning, 2011 Read More