During the past couple of decades, some of the greatest scandals in the history of accounting occurred. These financial frauds were the reason of loss of the billions of dollars, which, consequently, caused the destruction of the businesses and companies, and ending or ruining of the lives of many people. The actions of those individuals who are responsible for these financial disasters were driven by the enormous and endless greed. Millions of companies and people were affected by the biggest accounting scandals in the history. And yet, the most notorious one is the Bernie Madoff Scandal, which occurred in 2008. It was broadly covered in the media, and ten years after the scandal, it still rises numerous discussions and arguments. The primary effort to determine the essence of the Bernie Madoff Scandal was made by the contributing authors of Harvard Business Review Karen Berman and Joe Knight. Their article What did Bernard Madoff do? provided an in-depth overview of the Bernie Madoff Scandal, analysis of the used Ponzi scheme, and an explanation of how a normal balance sheet should be in an investment company.
The reviewed scandal is believed to be “the biggest fraud committed in the history of Wall Street” (Berman, & Knight, 2009) because the investor lost over $50 billion. The responsible former stockbroker, Bernie Madoff, was sentenced to 150 years in a cell. The essence of the fraud was in the attraction of a huge amount of investors to the company by offering them high returns together with the low risks. His activity had shown a multitude of red flags because what he promised to the investors was “too good to be true” (Berman, & Knight, 2009). Among the most visible red flags was the inability of any other investment company to match the performance of the Madoff’s investment company. Such excessive performance should have made potential and current investors doubtful regarding the actual investment. The higher risks of the Madoff’s investments were based on the higher returns, and, nevertheless, no questions were asked as long as the scale of returns was accepted by the investors. There were some years of progress and decline, but the Madoff’s company managed to return an untypically constant percentile rate of 12-13 percent. This fact made the company trustworthy for the investors. The Wall Street hedge funds, advisors, and the possible future investors felt disturbance because of such steady performance of the company. The competitors failed to comprehend the statements sent by the company to its investors because of the complexity and ambiguity of the messages. Disregarding any potential risks, the Madoff’s company ensured attraction of devoted investors, who were looking for the secure and steady returns.
The Ponzi Scheme as a variation of a standard financial pyramid scheme, and it was successfully used by Bernie Madoff. It was developed in the 1920s by Charles Ponzi. The essence of the scheme was to sell investments motivating the potential buyers by declarations regarding the healthy returns. In reality, those returns were paid from the funds delivered by the new investors. This scheme stands for an unsustainable chain of redemptions and acquisitions. The financial fraud of the Ponzi Scheme becomes evident of its balance sheet is compared to the normal balance sheet. In any investment company, the ‘own’ part of the balance is built from the cash on hand of the company and all the investments made by it. The ‘owe’ part is formed of the clients’ deposits. Consequently, the company owes those funds to the client. In a rightful and trustworthy investment firm, the ‘own’ and ‘worth’ parts will grow, while in a fraudulent one, according to the Ponzi Scheme, those values will decrease. In the Ponzi Scheme the ‘own’ part shows minimal or no growth, and thus, new people have to be attracted to make the cycle repeat itself. New cash means new returns, and so, the earlier investors will be paid with the money of the newer ones. The pressure on the company is made by a continuous demand for money. When the investment company is no longer able to follow the cycle, the company stops, and the whole scheme collapses. In case of Madoff, the financial crisis brought multiple redemptions than the company could afford to pay. The Madoff’s experience is unique because he managed to keep the company afloat for decades, while the original Ponzi’s company had lasted for only a year.
The article is published in a credible source, and the language used by the authors makes it easy for comprehension. It introduces multiple entrances of the topical financial vocabulary, which makes the article oriented more on the specific circle or category of readers. The article is comprehensive, and because of the representation of the profound research results, it explains a complex issue using the relatively simple terms. The depiction of one of the greatest financial frauds of the latest couple of decades – the Bernie Madoff Scandal – is sufficient for learning the basics of the potential accounting frauds.
In conclusion, the Bernie Madoff scandal, as depicted in the reviewed article, was one of the biggest and most serious scandals on Wall Street. The article presents a brief but in-depth analysis of the essence of the scandal, suggests a brief historical reference on the nature of the Ponzi scheme, and the ways to recognize a fraudulent investment firm from a non-fraudulent one. The red flags which should be minded before making the investments are described in the article. The Madoff Scandal is one of the most notorious pages of the U.S. history of accounting.
- Berman, K., & Knight, J. (2009). What did Bernard Madoff do? Harvard Business Review, June. Retrieved from https://hbr.org/2009/06/what-did-bernard-madoff-do
