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Madoff Ethics

Essay by   •  April 28, 2012  •  Research Paper  •  1,987 Words (8 Pages)  •  932 Views

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Business ethics is currently a high profile dilemma. This may be both due to the increased social pressure on businesses to conform to a more socially acceptable way of doing business. Additionally, media coverage of some astronomical business collapses due to fraud such as Sunbeam and Enron place added pressure to perform ethically or unethically. Evaluations of these events had enviably led to the interrogation of the morality of business people and more specifically accountants. Many experts argue that accountants have been the main contributors to the decline in ethical standards in business. The downward slope in ethical standards category in the accounting profession has many experts examining the depth of education accounting professionals study.

As far as accounting ethics is concerned, the most common and brought to the public's attention is the problem of fraud and its consequences. Fraud may be defined as the "deliberate misrepresentation of facts with the intent of deceiving someone" (Lanen, 2009, pg 415). 'The issue of the potential link between incentives and fraud is not new"(Lanen, 2009, pg 416). In 1987, the Treadway Commission reported the results of its study of financial fraud involving top management and fraudulent reporting to stockholders. The commission concluded, "fraudulent reporting came about from a combination of pressures, incentives, opportunities, and environment"(Treadway Commission, 1987). According to the commission, the forces that seem to give rise to financial fraud "are present to some degree in all companies. If the right combustible mixture of forces and opportunities is present, fraudulent financial reporting man occur"(Treadway Commission, 1987). The commission went on to say, "an incentive for fraud in financial reporting is to improve a company's financial appearance to obtain a higher stock price or escape a penalty for poor performance."

The United States has entities that have the crucial responsibility of monitoring accounting practices and ensuring the fair and balanced reporting of financial statements is a part of organization's public affairs. The FASB (Financial Accounting Standards Board) set their mission statement as "to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors and users of financial information" (FASB, 2012). A second legal organization focused on financial reporting is the U.S. Securities and Exchange Commission, or the SEC. The main goal of the SEC is to protect investors and to police the ethical and moral integrity of the trading market. "The SEC requires public companies to disclose meaningful financial and other information to the public, which provides a common pool of knowledge for all investors to use to judge for themselves if a company's securities are a good investment" (SEC, 2012). Finally, a board known as the Public Company Accounting Oversight Board (PCAOB) makes up the third player in the "fraudulent monitoring team." PCAOB is "a private-sector, non-profit corporation, created by the Sarbanes-Oxley Act of 2002, to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports" (PCAOB, 2012).

How do these entities play a role in the financial reporting skit? Shakespeare probably knew better than anyone just how complicated humans are. Humans have the capability to become masterminds in anything they put their concentration on. Enter Bernie Madoff. Convincing. Powerful. Brilliant. All of these characteristics describe Madoff's demeanor. If anyone were to hear another described using those characteristic they would think very highly of that individually initially. People who don't know of the multi billion-dollar scandal would think Bernie Madoff must be a "good" or "ethical" investor. They would become just as shocked as his investors when the truth is revealed.

"Bernie Madoff worked in the trading business for forty years" (Creswell, 2009). Madoff was able to find many extremely wealthy and sophisticated investees who were financially illiterate when it came to investing and trading. It is notable that Madoff took complete advantage of this population. The people who worked with Madoff on the inside were very well respected members of their community. "They were members of country clubs and lead the business societies in their towns" (Wall Street Journal Live, 2010). They presented themselves as being very trustworthy. Any person who happened to be looking for a financial manager would turn to someone who carried that reputation. People who have such a high reputation also know others who sit at the same level. This is how the insiders knew to refer Bernie Madoff to those seeking a very knowledgeable and "trusting" investor.

Investees only got through to Madoff via invitation. "I don't know if he'll take you, but I can ask" (Wall Street Journal Live, 2010) would be the type of statements made by those working on the inside with Madoff. Humans are so drawn to status, reputation, and wealth. Because Madoff carried the highest level in all of these categories, people constantly were hooked when they found out their name would be brought to Madoff's attention. He would often turn down potential clients, and this would help him target his best investors with the most money to play with.

Every generation has its "Charles Ponzi." One type of Ponzi scheme is that of being fraud from the start. "As long as the outcome is income, the leader of the scheme will keep it alive"(Biggs, 2009). The other type is when a financial manager starts a legit investment, but something goes seriously wrong. They could have made a poor trading decision on the market and will go great lengths to cover it up to have the trust, confidence, and reputation of the business remain. Bernie Madoff entered in this second scene.

Many Ponzi schemes start out legitimate. The Madoff scandal was no different. The moral choice comes up when the investor over promises the investee's return, or the investor can under deliver. The struggle for the investor comes when they are making the decision to fess up and come clean,

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