Berny Madoff’s Ponzi scheme

Globalization has necessitated the need to develop a code of morality for different professions, imputable to the need to streamline operations across the globe. The method of history profession is integrity of these professions which is regulated by the code of ethical motive. The major excogitation it serves in this profession is to prevent mis consume of account separatement nonrecreationals, and develop a standard way of yielding method of account information. However, despite the presence of these regulations, serious scandals such(prenominal) as fraud still occur in many companies. there has been an increase in fiscal scandals in motley US companies, and or so of them can be traced to lack of controls and disregard for the code of ethics. The code of ethics has been ignored by many professionals, a concomitant which has guide to the payoff of these scandals. The Berny Madoff ponzi scheme is one such scandal, which has caused huge losses to various banks and new(prenominal) institutions. The paper will discuss this scandal in relation to the accounting code of ethics, and their determination in preventing such scandals.Berny Madoff ponzi scheme. Bernard Madoff masterminded what may be the largest received fraud in history committed by an individual. He confessed to having masterminded a ponzi scheme, through and through his trustworthy Madoff Securities, which led to losses amounting to all over $50 one thousand million (Zambito and Smith 2008). A ponzi scheme is a fraud which involves payment to investors, tabu of money received from previous investors, rather than profits. Madoff used a schema of investiture called the split-strike system.It abstruse purchasing stocks, and simultaneously purchasing options, to guard against losses, and these were know as puts. In case the cost of the puts went down, Madoff would trade in calls, which involved trading these stocks to buyers who claimed at profiting from pocketable gains. This strategy ensured that he made small profits in cases where sh atomic number 18s appreciated in value, aft(prenominal) numerous trades. However, with time, some financial analysts began questioning the profits that Bernard made from these trans meets.They were concerned that his methods of investment were incapable of earning the level of profits he enjoyed, and recommended an investigation on his activities (Henriques A1). In fact, Madoff Securities were investigated for over eight times by the regulatory bodies. The investigations did not find major problems, since they were not looking at the in-depth operations of the level. Some analysts actually suspect that it was a ponzi scheme way before it became clear to investigators. They questioned the use of an audited account firm with only one auditor and accountant.They excessively questioned the unusual strategy which involved avoiding disclosure of SEC holdings, through selling them for cash after each period. In the beg inning of 2008, the market downturn revealed that Madoff Securities were in fact dealing in a ponzi scheme (Naidu 2008). This was as a turn up of several requests by investors to withdraw their money, which amounted to $7 billion, and Madoff could not honor their requests. He was forced to confess the truth to his sons, who reported him to the authorities. He was resultantly indicted in December last year.Role of strict standards in the accounting profession. The accounting profession requires honourable guidelines which are used by both the accounting professionals and their clients (Carey and the American Institute of Certified Public Accountants 1-5). The strict standards are honest to all stakeholders in a business. We will analyze the role of these ethical standards according to various stakeholders. Accountants. In these modern times, globalization has transversed boundaries and connected the world.This has led to the emergence of multi-nationals, with branches in differen t countries. Since the parent companionship has to standardize its accounting reports across several branches, it is necessary to present a global similar way of preparing and presenting accounting reports to stakeholders. Examples of accounting standards are the IFRS and GAAP accounting standards. This is one purpose that accounting ethics serve, and it enables companies to easily compare their performance with others. chronicle ethics also helps accountants to maintain integrity and professionalism in their profession so that it may remain respectable and profitable. Ethical standards such as professional competence, objectivity and confidentiality help the accountants to prepare accurate and complete financial reports. Flouting these standards leads to consequences such as de-registration from the professional body, suspension of the practicing license, criminal liability among other consequences.Madoff flouted these rules through committing fraud, a situation which led to cri minal proceedings being preferable against him. He now faced the possibility of spending a long time in jail, as well as paying hard fines. Investors. Investors require knowledge about market trends and stock movements before make investment decisions, in narrate to get favorable returns on their investment. afterwards investing in a company, investors are very interested in knowing the performance of the company in order to make investment decisions.In order to facilitate this, it is weighty to prepare accurate financial statements which enable investors to make proper adjustments in investment. The accounting code of ethics helps in achieving this purpose through enabling accountants present the true state of affairs of a company. In the case of Madoff Securities, the disregard of the code of ethics has led to the apparent loss of over $40 billion by investors who include companies, banks and individuals. Some investors, such as Martin Roseman who lend Madoff $10 million, pull in sued him in order to get back money they are owed.Financiers. in the lead a company can receive a loan from a financier such as lending institutions, there are various aspects which are analyzed. whizz aspect is the financial performance of the company. If a firm performs financially well, then the financiers are confident that they will be paying(a) back, with minimal risks. However, firms which perform poorly ready higher chances of defaulting on payments and are less likely to receive loans from financial institutions. As a go out of this, firms may be tempted to misrepresent their financial position in order to obtain financing.Madoff Securities can be said to be one firm which engaged in this practice, since the firm could not survive without additional funds from new investors, in line with operations of a ponzi scheme. The code of conduct comes in, in such a case, to discourage these practices. news report principles such as prudence requires that firms do not u nderstate their expenses or overstate their assets, in contrast to operations of ponzi schemes. This is beneficial to financial institutions since it enables them to finance companies with minimal risk.Accounting principles responsible for Madoff Securities collapse. Several accounting principles which were broken, were responsible for the financial collapse of Madoff Securities. One principle, prudence, requires that accountants anticipate losses and make provisions for them early enough (Kwok 30-38). It also requires accountants not to overstate the value of their assets (Marriott et. al. 221-223). Madoff Securities did not provide for the losses referable to fraud, and actually concealed them over several years, through the use of subsequent investor deposits.When they were finally revealed several stakeholders were affected, among them some charitable organizations which had to close down due to reliance on this firm (Storm 2008). According to Warren et. al. (34-35), another pr inciple of accounting is the twinned concept. This concept states that expenses which are incurred in the course of generating revenue should be recognized during this period. This is done to ensure that comparison between revenues and expenses of a similar accounting period can be achieved (Eskew and Jensen 40-42).This is very important in making business decisions. In the case of Madoff Securities, expenses which the company incurred were matched with proximo revenues in order to conceal the fraud. This means that the accountants did not follow the matching concept, which was responsible for the accrual of huge expenses over the years. Accounting standards require that the accountants present the true state of affairs of a company. Misrepresentation of the state of affairs is a violation of these standards.Madoff Securities misrepresented the financial position of the company, presenting it as a profitable firm, yet it had significant liabilities. This misrepresentation attract ed new investors, which led to the company owing over $50 billion to investors at the time of collapse. determination and recommendation. Bernard Madoffs ponzi scheme has been seen to have affected very many local and outside(a) investors. The ignorance of the code of ethics and accounting principles that have been discussed was a major constituent which caused this scandal.The code of ethics in accounting helps to protect the interests of all stakeholders of a company. It also makes it easier for companies to compare performance, due to standardization of accounting report preparations and presentation. Madoff forgot one fact about ponzi schemes they eventually collapse due to the inability to breed sudden withdrawals by investors. The economic meltdown played a role in exposing this scheme. It is important that the role of the market regulators with regards to the scheme be soundly investigated, since several warnings were given prior to detection of the scandal.If the author ities had acted sooner, the loss would have been lower than it currently is. The stock regulatory authorities need to take measures that deter such practices. One of them would be to scrutinize transactions of companies with the aim of detecting irregular and unethical accounting practices. The next course of action would be to investigate the detected suspicious trends, even if the actions are not entirely illegal. This will minimize the risk of loss attributable to fraud, by investors in the stock market.