Guest Author - Consuelo Herrera, CAMS, CFE
Sadly many investors have been defrauded again and forensic accountants are busy helping regulators to establish the true scope of the Ponzi scheme that led to investors’ losses close to 50 billion. This scandal has undermined the public trust in the accounting profession in the regulators as the SEC who failed to see fraud indicators that could have prevented this large scheme for going on for over ten years.
What is a "Ponzi" Scheme?
As described by the Federal Bureau of Investigation (FBI) a Ponzi scheme is essentially an investment fraud wherein the operator promises high financial returns or dividends that are not available through traditional investments. Instead of investing victims' funds, the operator pays "dividends" to initial investors using the principle amounts "invested" by subsequent investors. The scheme generally falls apart when the operator flees with all of the proceeds, or when a sufficient number of new investors cannot be found to allow the continued payment of "dividends."
Would you think that a 50 percent return on investment is viable? I would even consider that option. Too good to be true! However, the Ponzi scheme started when Charles Ponzi of Boston Massachusetts guaranteed an unfeasible 50 percent return on the investment in postal coupons.
Many investors are deceived because of the anticipation of making money rapidly through an aggressive portfolio. Ponzi scheme masterminds are smart individuals who know human behavior and how to entice investors who trust their money to them.
Uncover a Ponzi scheme can take many years. What triggers a Ponzi scheme to fall apart is that investors who enter the scheme later do not receive their money nor their return on the investment as it has been used to pay those who enter the scheme in its early stages.
The FBI suggests these tips to avoid Ponzi schemes:
o As with all investments, exercise due diligence in selecting investments and the people with whom you invest.
o Make sure you fully understand the investment before you invest your money.
The SEC is investigating the recent and most devastating Ponzi scheme. It involves a well-known and respected financial “guru”, Bernard Madoff. Because of his knowledge and reputation wealthy persons entrusted their money to his firm and now it seems that more than $50 billion are gone!
The FBI stated that on Dec. 10, 2008, that Madoff informed the Senior Employees, in substance, that his investment advisory business was a fraud. According to the FBI, Madoff stated that he was "finished," that he had "absolutely nothing," that "it's all just one big lie," and that it was "basically, a giant Ponzi scheme. According to the FBI, Madoff stated that the business was insolvent, and that it had been for years. Madoff also stated that he estimated the losses from this fraud to be at least approximately $50 billion. Madoff further informed the Senior Employees that, in approximately one week, he planned to surrender to authorities, but before he did that, he had approximately $200-300 million left, and he planned to use that money to make payments to certain selected employees, family and friends.
Once again, the accounting profession has gained bad reputation thanks to the firm in charge of auditing Madoff’s firm financial statements. The question remains, could this debacle have been prevented had the external auditors identified red flags in fraud indicators in Madoff’s financial and non-financial information.
The SEC is questioning how this scheme could remain undetected. According to the SEC, progress to date indicates that Madoff kept several sets of books and false documents, and provided false information involving his advisory activities to investors and to regulators.
Forensic accountants who are aware of these red flags and have the skills and training could have spotted fraud symptoms in a preventive manner, now, however, they are working along with the Securities and Exchange Commission in uncovering what truly took place in this unprecedented Ponzi Scheme.