Question

Assume you are the internal controls expert for your company. Your boss has read about Madoff’s Ponzi scheme described in a page 359 of our textbook. Your boss is now worried that your own company, which invests a significant amount of retirement funds for its employees, could fall victim to a similar scheme. He has just sent you a memo asking: "Which specific internal controls should our company adopt to avoid falling for a scheme like this?"

Respond with a memo to your boss detailing at least three internal controls that you would recommend implementing at your company, assuming none are in place right now, to minimize the risk of becoming the victim of an investment fraud. For each internal control you recommend provide:

1. A detailed description of the policy or procedure to be implemented.

2. An explanation of how specifically it would mitigate the risk of being defrauded.

3. A description of any disadvantages the internal control may have.

Edit: Ponzi scheme described in p. 359 of the textbook:

No recent fraud has generated more interest and rage than the one perpetrated by Bernard Madoff. Madoff was an elite New York investment fund manager who was highly regarded by securities regulators. Investors flocked to him because he delivered very steady returns of between 10% and 15%, no matter whether the market was going up or going down. However, for many years, Madoff did not actually invest the cash that people gave to him. Instead, he was running a Ponzi scheme: He paid returns to existing investors using cash received from new investors. As long as the size of his investment fund continued to grow from new investments at a rate that exceeded the amounts that he needed to pay out in returns, Madoff was able to operate his fraud smoothly. To conceal his misdeeds, he fabricated false investment statements that were provided to investors. In addition, Madoff hired an auditor that never verified the accuracy of the investment records but automatically issued unqualified opinions each year. Although a competing fund manager warned the SEC a number of times over a nearly 10-year period that he thought Madoff was engaged in fraud, the SEC never aggressively investigated the allegations. Investors, many of which were charitable organizations, lost more than $18 billion. Madoff was sentenced to a jail term of 150 years.

Answer 1

There are numerous estimates an organization can embrace to elevate the guidelines of inside controls, anyway not many of those are counted as under -

1. Due Diligence - nearly everybody would propose it yet the usage contrasts from organization to organization. The term incorporates wide exercises for example from improving nature of inner review to upkeeping of money related records and so on. Keeping a mind existing and old venture example would positively help in examining the reaction of speculations according to winning economic situation. Disservices of the procedure incorporate involvement of extra labor and cost.

2. Picking right Investment firms as well as Fund Manager - In the intricate business showcase which wins today, seeing the correct person appears as a troublesome activity. It is significant that we cautiously study not just the speculation designs and ensuing returns of the Investment firms/Fund Manager yet in addition foundation, capabilities and past legitimate records to show up at appropriate person for reasonable occupation. At times we pick a distrustful yet a fair person, which may prompt penance in momentary gains yet particularly in retirement assets with long haul objectives, security of assets accept need.

3. Choosing the money related items - Today there are various budgetary items accessible in the market, a significant number of them offer extravagant returns however the objectives of such monetary items must be re-adjusted to the objectives of the organization and its representatives. For the organization a nice return over since a long time ago run with high level of security is the target with regards to retirement reserves. The budgetary item should have a suitable blend of obligation, value and fluid assets and especially the part of obligation must increment with the age of a worker which will guarantee security of assets when he achieves superannuation. Drawback significantly remembers loss of profits because of less speculation for value during the last phases of vocation.