Question

Professional auditing standards discuss the three key "conditions" that are typically present when a financial fraud occurs and identify a lengthy list of "fraud risk factors." Briefly explain the difference between a fraud "condition" and a "fraud risk factor" and provide examples of each. What fraud conditions and fraud risk factors were apparently present in the Madoff case

Answer 1

Fraud conditions refer to the elements typically present when a fraud occurs - pressure, opportunity, and rationalization. Fraud risk factors are circumstances that raise the potential for fraud, such as management attitudes and ineffective monitoring. The Madoff case involved fraud conditions like the pressure to perform and opportunities from lack of oversight, along with trust and strategy complexity as fraud risk factors.

Step-by-step explanation:

Professional auditing standards differentiate between fraud conditions and fraud risk factors. Fraud conditions, often referred to under the fraud triangle, comprise three elements that are typically present when a financial fraud occurs: pressure or incentive, opportunity, and rationalization. For instance, a person may feel pressured to maintain a certain lifestyle, perceive an opportunity to embezzle funds without detection, and rationalize the fraud as borrowing. On the other hand, fraud risk factors are circumstances that increase the likelihood of fraud occurring, such as management's attitude towards financial reporting, history of violations, or ineffective monitoring.

In the case of Bernard Madoff's Ponzi scheme, the fraud conditions present were: the pressure to deliver high returns to investors, the opportunity created by Madoff's control over the investment firm and lack of effective oversight, and his rationalization of the fraud, possibly seeing it as a temporary measure or justified by the returns he had previously generated for clients. Fraud risk factors included Madoff's respected status in the financial community, which created blind trust, and the complexity of the investment strategies he claimed to use, which made the fraud difficult for investors to detect.

Answer 2

Answer: Fraud is a crime or an offense to deliberately mislead others for the purpose of harming them, currently obtaining their property or services unfairly. Fraud can be done through aid to counterfeit objects.

Fraud risk factors are events or conditions that include encouragement or pressure for fraud to be perpetrated or offered the opportunity to occur. If there is a large amount of bills and coins, or cash in bank accounts, there is a very high risk of fraud.

In Bernard Madoff's case, he promised about 1% return per month, his strategy was to attract more and more new customers and use this money to pay older customers who wanted to redeem their income.

Generally scammers who use this system, using very aggressive marketing to attract more and more new investors, they also recruit large and renowned investors to give their business more credibility.

To justify the high return to the month, scammers always claim to have an innovative and exclusive technique in the market, and because of commercial strategy, can not reveal the operation of this technique.