Evaluating Ethics Of Bernie Madoffs Investment Securities Fraud Accounting Essay

Every concern has an ethical duty non merely to stakeholders but besides to society at big. This duty should be in line with stakeholder involvement and society ‘s public assistance. The authorities and regulators have a duty of guaranting that houses follow these ethical aims. Failure to make so may take to losingss which will non merely affect stakeholders but society at big. The fiscal fraud which was experienced in Bernie Madoff Investments in the US is a clear illustration of the losingss which may be incurred due to failure to detect ethical duty by houses. Bernie Madoff operated his company, Madoff Investments in an unethical manner and this led to severe effects to stakeholders and society at big which incurred losingss amounting to one million millions of dollars. Although he was subsequently arrested and punished for the offenses, his victims have non been able to retrieve from the fiscal losingss incurred and several developed unwellnesss associated with emphasis and depression over the effects of the dirt.

This paper will measure the Bernie Madoff fiscal fraud in relation to ethical duty of houses. The fiscal fraud practiced by Bernie Madoff will be analyzed in item and the effects on stakeholders and society discussed. The ethical duty which houses have in relation to their stakeholders and society will besides be analyzed in the paper. Finally, the steps which should hold been taken by the authorities and regulators to forestall the Bernie Madoff dirt and other subsequent fiscal dirts will besides be outlined in the paper. The discussed issues will be summarized at the terminal of the paper.

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Introduction

Business moralss is an of import facet of any concern environment since it ensures that the aims of houses are achieved in ethically acceptable ways. It besides ensures that houses perform their ethical duty towards society in order to safeguard its public assistance. Businesss are expected to set about activities in a legal manner which conforms to rules such as prudence, honestness, full revelation, societal and environmental duty among others. They are besides expected to run in manner which is environmentally and socially friendly to the local community and society. Failure to conform to ethical demands is normally damaging to assorted parties involved in the concern activities. These include the stockholders, community, authorities, providers or other parties which have a interest in a concern.

Bernie Madoff is an American investing advisor and stock agent who operated Madoff Investments in an unethically acceptable mode. He used the company as a forepart to perpetrate a Ponzi strategy which fleeced investors of over $ 65 billion ( Arvedlund, 2009 ) . This has been regarded as the largest Ponzi strategy of all time. Madoff grew up in a low background and he established the Madoff Investments Company with support from the male parent in jurisprudence. A few friends and household members besides supported Madoff with the operations and growing of the concern. Madoff used the returns from investing to back up several charitable and political causes which his house believed in.

However, in 1999, there was concern that the net incomes made by Madoff Investments surpassed the normal net incomes expected from a house in such a venture. Markopolos, an expert in investings informed the exchange committee that it was non possible to accomplish the degree of net incomes which were achieved by Madoff Investments and it is possible that the house engaged in fraud. Several probes were undertaken during the following few old ages and in 2008, Madoff was unable to pay returns demanded by investors. It was so that he admitted that his investing strategy was a Ponzi strategy and he was subsequently charged in tribunal with fraud. Madoff was sentenced to 150 old ages and is presently functioning his term. This paper will further discourse the Madoff securities dirt with mention to the ethical duty which organisations have against stakeholders.

Bernie L Madoff investing dirt

Madoff undertook fiscal fraud through beliing the nature of his concern to investors and promoting them to put in his company. Madoff founded a company, Madoff Investments which dealt with investing of securities and portions. He began runing with a capital of about $ 50,000 but in a decennary, this amount had increased to 100s of 1000000s of dollars ( Fred, 2009 ) . Potential investors saw the company as successful and they invested one million millions of dollars in the concern. However, Madoff did non cover wholly with fiscal investings but he carried out a Ponzi strategy, with the fiscal investing as the forepart. He used investings by new stockholders to pay returns to earlier stockholders without truly doing net income from the capital invested. It is of import to understand how Ponzi schemes work in order to explicate Madoff ‘s schemes. Ponzi strategies are financed by capital from subsequent investors. For case, if investor A invested in 2000 and investor B invested in 2001, Madoff used the capital invested by investor B to cover for the returns of investor A. Investor B ‘s returns would later be paid by capital invested by a new investor, C and boy on ( Fred, 2009 ) .

In order to cover for the fiscal fraud, Madoff used the fiscal investings as a forepart for his fraud. He falsified return signifiers of investors and gave returns harmonizing to pre-determined rates in order to avoid raising intuition. These returns, as explained, were financed by capital from subsequent investors. A computerized plan was used to distort the histories and guarantee that they balanced, to avoid intuition from fiscal regulators. However, several people raised intuition with the immense returns associated with Madoff Investments. It was seen as impossible to gain such high returns from trading in fiscal securities without prosecuting in fraud. In 1999, the first intuitions were raised although it took over 10 old ages for the Ponzi strategy to be uncovered. This has been blamed by inefficiency by fiscal regulators and the US authorities. Effective probes would hold unearthed the dirt within the first five old ages of operation.

However, as is common with Ponzi strategies, it collapsed. These strategies collapse when returns required by old investors surpass the investings made by new investors ( Beach, 2007 ) . When this happened to Madoff Investments, he confided to his household that the investing house was a merely forepart for carry oning fraud through the Ponzi strategy and it did non in fact exist. One of his boies reported this to the constabulary. This led to his subsequent apprehension and he was charged in tribunal. He pleaded guilty and received a sentence of 150 old ages. His household, including his married woman apologized to the public although their functions in the dirt were farther investigated and they were cleared. Madoff is presently functioning his term.

Ethical issues sing Madoff investings

It has been discussed in the debut phase that concerns are expected to set about their personal businesss in ethically acceptable ways which conform to societal values. Businesss are expected to conform to rules such as prudence, honestness, full revelation, societal and environmental duty among others ( Diller et. al. , 2006 ) . They are besides expected to run in manner which is environmentally and socially friendly to the local community and society at big. Ethical motives normally dictates the manner concern undertake their operations and it is determined by organisational aims, any professional moralss and authorities ordinances when runing within the concern environment. Firms normally follow concern moralss to run into the demands of stakeholders while safeguarding the public assistance of society ( Beach, 2007 ) .

There are assorted ethical issues which arose during the Madoff dirt and which are contrary to ethical demands of concerns. One of these issues is fraud. Businesss are non expected to prosecute in fraud since it is non merely against concern involvements, but it is besides illegal under jurisprudence. When Madoff and his staff engaged in fraud, they broke the ethical duty towards organisational stakeholders and in add-on, they committed a offense. This led to his gaol sentence of over 100 old ages. The 2nd ethical issue which arises when analysing the Madoff instance is deceit. Firms are required to follow the ethical duty of full revelation to all organisational stakeholders ( Fred, 2009 ) . Misrepresentation is non merely a breach of ethical demands but it is besides a offense. Madoff misrepresented the province of his house ‘s fundss and a false belief that it was doing net incomes. This is what attracted the 1000s of investors to Madoff Investments. Misrepresentation besides enabled Madoff flight sensing from fiscal regulators although there was intuition on his illegal patterns.

The 3rd ethical issue which arises from the instance survey is money laundering. This is the usage of a legal beginning of gross to conceal illegal beginnings of gross or grosss which have non been declared or taxed by the authorities. This is an unethical pattern which is a offense and is punishable by many old ages in gaol. Madoff used his investing house as a forepart to conceal the grosss which were received through the Ponzi strategy. The investing house was used to portray the concern activities are legal and to conceal the true beginnings of gross. Money laundering is a offense which Madoff was charged with and it contributed to his long gaol sentence.

How the investing negatively affected stakeholders

There are several negative effects which Madoff Investments had on stakeholders. These will be analyzed on the footing of their relationship with the company.

Investors

Investors are some of the stakeholders who were worst affected by the dirt. The investing lost by investors surpassed $ 65 billion, which is immense by all criterions. The little scale investors were most affected since many were households and families in the in-between income position. Families which lost their investings suffered assorted inauspicious effects including wellness jobs associated with emphasis and depression which emanated from the losingss ( Eamon, 2008 ) . Some investors passed off due to wellness complications occasioned by the daze of losing their life-time nest eggs. Others had their lifestyle changing in order to suit the losingss, some of which arose from borrowed finance used to put in Madoff Securities.

Employees

Employees were besides to a great extent affected by the Madoff Securities dirt since most lost employment chances. As a consequence of the inability of the house to stay liquid, it was closed to guarantee that farther losingss were non experienced by stakeholders ( Eamon, 2008 ) . Employees who relied on the house for their support lost occupations and many were unable to back up themselves and their households. Some developed wellness complications from emphasis associated with loss of employment while others changed their life style to suit their lessened income earning position. Although some employees secured employment in other houses, many suffered immense fiscal losingss as the company was unable to counterbalance them for the occupation loss ( Eamon, 2008 ) .

Creditors

Creditors besides suffered from the closing of Madoff Securities. There was over $ 100 million which was straight owed to creditors due to proviso of outsourced services to Madoff Securities. It is of import to observe that these creditors were separate from stockholders. Some of the creditors were able to retrieve money owed while some could non ( Eamon, 2008 ) . This led to the closing of some of the houses which provided services and goods to Madoff Securities.

Charities

There are assorted charities which suffered as a consequence of the closing of Madoff Securities. Some of the charities which were affected by closing of the house include JEHT Foundation, Robert Lappin Foundation and Chais household Foundation. These charities to a great extent relied on fiscal support from Madoff Investments and without equal financess, some were forced to scale down their operations and provide charity services to fewer people. In add-on, some of the causes which were supported by Madoff Securities such as lymphoma research besides to a great extent suffered as a consequence of the settlement of the house. Madoff contributed over $ 4 million yearly to back up this research and the closing of Madoff Securities affected the support towards lymphoma research ( Eamon, 2008 ) .

Local communities

The local community besides suffered from the closing of Madoff Securities from the fraud dirt. Madoff Securities supported assorted societal causes which the communities identified with. The house contributed liberally towards community undertakings which were geared towards authorising the population. This was achieved through the corporate societal duty plans. The house besides funded instruction and preparation chances for destitute kids in the local community. After the closing of the house, some of these causes which were supported by Madoff Securities collapsed due to absence of givers who would propagate the work which had been started by Madoff ( Fred, 2009 ) . Some of the kids who would hold been empowered through instruction besides lost an chance after the house was closed.

Government

Finally the authorities experienced inauspicious effects due to the Madoff fiscal dirt. One of the major effects is the loss of possible revenue enhancement grosss from the house. The house normally paid 1000000s of dollars in one-year revenue enhancement and this beginning of finance was lost by the authorities. This affected the development plans and infrastructural developed normally paid for through this revenue enhancement beginning. In add-on, the authorities faced inauspicious promotion particularly due to its inability to observe the dirt and move on clip even through several ruddy flags had been raised on the issue. It was besides leery that Madoff supported certain authorities causes and political parties which may hold been construed to explicate why he was non arrested instantly after the dirt began.

The negative impact the investing had on the economic system

There is a macro facet of the dirt which affected the overall American economic system. Assorted costs were incurred by the authorities and economic system at big, which negatively affected growing and development. The cost of the inauspicious wellness effects of the victims of the dirt including employees and investors were passed on to the economic system. Investors and employees who became sick due to the emphasis and depression experienced partially increased the health care costs to the economic system. The loss of manpower due to loss of occupations by employees compounded by losingss incurred by investors and creditors was a immense cost to the economic system. The authorities was partially responsible for settling these victims and it besides lost grosss from the closing of the Madoff Investment house. These indirect and direct costs which were passed on to the authorities reduced the available income for infrastructural and societal development in the US. As a consequence, the economic development and growing degrees were affected by the dirt. The weight of the financess involved which was over $ 60 billion, slowed down economic growing degrees.

Another inauspicious impact to the economic system is a diminution in investing. Many investors who had invested in Madoff Securities lost their investings and this made them reluctant to put in future ( Arvedlund, 2009 ) . Other investors who had invested in other companies besides pulled out their investings in attempts to debar a crisis similar to the 1 experienced at Madoff Investments. The market by and large adopted a prophylactic attack towards investing since the Madoff Scandal discouraged consumers from investing. The diminution in investing degrees straight affected economic growing. For the economic system to turn at that place has to be high investing degrees. The diminution in investing due to the dirt reduced the economic growing rate. The authorities to a great extent invested in promoting the market to put more in securities and portions.

How the dirt could hold been prevented

There are several steps which should hold been taken to cut down the likeliness of the fraud dirt. Some of these steps should be implemented in future in order to deter a similar dirt in the US concern environment. Some of these steps will be discussed below ;

Audited accounts

Audited accounts are effectual in forestalling fraud particularly in instances where they are external in nature. Madoff did non transport out regular audits and he falsified paperss in order to forestall the sensing of the fraud which was being committed. External and internal audits should hold been often undertaken in order to analyse the accurate fiscal place of the house. These audits would hold revealed the fraud in a timely mode and prevented farther losingss to the organisational stakeholders. Directors should set about frequent audits in order to promote ethical patterns in concern and to deter fraud.

Accounting engineering

Technology is besides likewise effectual in forestalling accounting fraud. Technology should hold been used to curtail entree to information on Madoff Securities. Passwords, locks and others should hold been used to curtail the confidential information and in the event that histories were tampered with, it would hold been clear on who gave mandate to entree the records. Technology would besides hold been used to let investors to entree fiscal records of Madoff Investments online ( Arvedlund, 2009 ) . Access to such information would hold revealed any illegal or unethical patterns in the house. Future directors should do usage of engineering to guarantee that concern operate in an ethically acceptable mode.

Employee motive

Employee motive is an effectual tool in the operations of any house. Employees have to be motivated if they are to run in an ethical mode. This is because employees with high motive degrees are proud of houses they work in and are likely to merely execute actions with are consistent with organisational ends. Such employees are hence less likely to prosecute in fraud or other unethical behaviour ( Bateman, 2010 ) . If the employees at Madoff Investments had high motive degrees, they would non hold collaborated with Madoff in perpetrating fraud and the dirt would hold been exposed earlier. Directors should actuate employees by utilizing both non fiscal and fiscal wagess in order to hike their public presentation and increase their trueness to the house.

Government action on the Madoff Scandal

The authorities took several steps in order to extenuate the harm caused by the fiscal dirt and every bit good as discourage farther dirts in future. The first action taken was to beef up fiscal ordinances and probes into market participants in the stock exchange ( Wilhelm & A ; Joseph, 2010 ) . The authorities passed several ordinances which houses were supposed to adhere to in order to guarantee that they operated in ethically unsloped ways. Another measure which was taken by the authorities was to develop statute law to deter future fiscal fraud instances. The authorities developed rough penalty for houses and people who are involved in fiscal fraud. This included heavy mulcts, prison sentences or both. These Torahs were passed by Congress and they have been effectual in detering fraud.

The authorities besides took stairss to restore the victims of the dirt. Assorted assets, grosss and histories which were linked to Madoff Investments were frozen and financess consolidated in attempts to pay back investors ( Wilhelm & A ; Joseph, 2010 ) . Small investors received precedence when being compensated although larger stockholders besides received a portion of gross collected. Creditors were besides compensated for the services which they had rendered to Madoff Investments. However, most investors were non to the full compensated for the losingss incurred due to old money laundering schemes which Madoff had undertaken.

Supplication, condemning, and prison life

When Madoff was charged with the discourtesy, he pleaded guilty for the discourtesy. However he was non a concerted informant and he did non uncover other people he conspired with to perpetrate the fiscal fraud dirt. The justice had the option to ticket him, gaol him or use both signifiers of sentences. The justice sentences Madoff to 150 old ages in prison, an equivalent of life imprisonment.

How investors should protect themselves from fraud

There are different steps which investors should implement in order to guarantee they are non victims of fraud. The first measure which investors should take is demand regular audits of their house. Audited accounts should be demanded through their one-year AGM meetings and these will promote the direction to run within ethically acceptable ways. The 2nd measure is confer withing external experts. Experts peculiarly those in the fiscal services industry should explicate the projected returns on investings over a period of clip. For case, an expert would hold explained to investors in the Madoff Investment dirt that it was impossible to have such big returns within short clip periods and this would hold made them leery of the operations of the house. This would hold prevented the losingss of investing made by stockholders.

Finally, investors should coerce the direction to do the histories public particularly when there are media studies about an improperness by the direction. In the Madoff dirt, investors were cognizant of inauspicious studies on the operations of the house but they ignored these studies. If they had pressured the direction to let go of fiscal statements, the fraud would hold been exposed earlier and saved the investors one million millions of dollars. The investors should guarantee that they have a timely and accurate position of the fiscal place of their house at any one clip.

Summary and decision

This paper has discussed the Bernie Madoff fiscal fraud in relation to ethical duty of houses. The fiscal fraud practiced by Bernie Madoff has been analyzed in item and the effects on stakeholders and society discussed. Bernie Madoff operated his company, Madoff Investments in an unethical manner and this led to severe effects to stakeholders and society at big which incurred losingss amounting to one million millions of dollars. He used the company as a forepart to perpetrate a Ponzi strategy which fleeced investors of over $ 65 billion. This has been regarded as the largest Ponzi strategy of all time. However, in 1999, there was concern that the net incomes made by Madoff Investments surpassed the normal net incomes expected from a house in such a venture. Several probes were undertaken during the following few old ages and in 2008, Madoff was unable to pay returns demanded by investors. It was so that he admitted that his investing strategy was a Ponzi strategy and he was subsequently charged in tribunal with fraud. Madoff was sentenced to 150 old ages and is presently functioning his term.

There are assorted ethical issues which arose during the Madoff dirt and which are contrary to ethical demands of concerns. One of these issues is fraud. Businesss are non expected to prosecute in fraud since it is non merely against concern involvements, but it is besides illegal under jurisprudence. The 2nd ethical issue which arises when analysing the Madoff instance is deceit. Firms are required to follow the ethical duty of full revelation to all organisational stakeholders. Madoff misrepresented the province of his house ‘s fundss and a false belief that it was doing net incomes. The 3rd ethical issue which arises from the instance survey is money laundering.

There are several negative effects which Madoff Investments had on stakeholders. Investors are some of the stakeholders who were worst affected by the dirt. The investing lost by investors surpassed $ 65 billion, which is immense by all criterions. Employees were besides to a great extent affected by the Madoff Securities dirt since most lost employment chances. Creditors besides suffered from the closing of Madoff Securities. There was over $ 100 million which was straight owed to creditors due to proviso of outsourced services to Madoff Securities. There are assorted charities which suffered as a consequence of the closing of Madoff Securities. Some of the charities which were affected by closing of the house include JEHT Foundation, Robert Lappin Foundation and Chais household Foundation. The local community besides suffered from the closing of Madoff Securities from the fraud dirt. Madoff Securities supported assorted societal causes which the communities identified with. After the closing of the house, some of these causes which were supported by Madoff Securities collapsed due to absence of givers who would propagate the work which had been started by Madoff. Finally the authorities experienced inauspicious effects due to the Madoff fiscal dirt. One of the major effects is the loss of possible revenue enhancement grosss from the house. In add-on, the authorities faced inauspicious promotion particularly due to its inability to observe the dirt and move on clip even through several ruddy flags had been raised on the issue.

There are several steps which should hold been taken to cut down the likeliness of the fraud dirt. Some of these steps should be implemented in future in order to deter a similar dirt in the US concern environment ( Wilhelm & A ; Joseph, 2010 ) . Audited accounts are effectual in forestalling fraud particularly in instances where they are external in nature. Directors should set about frequent audits in order to promote ethical patterns in concern and to deter fraud. Technology is besides likewise effectual in forestalling accounting fraud. Technology should hold been used to curtail entree to information on Madoff Securities. Future directors should do usage of engineering to guarantee that concern operate in an ethically acceptable mode. Employee motive is an effectual tool in the operations of any house. Employees have to be motivated if they are to run in an ethical mode. Directors should actuate employees by utilizing both non fiscal and fiscal wagess in order to hike their public presentation and increase their trueness to the house ( Bateman, 2010 ) .

There are different steps which investors should implement in order to guarantee they are non victims of fraud. The first measure which investors should take is demand regular audits of their house. Audited accounts should be demanded through their one-year AGM meetings and these will promote the direction to run within ethically acceptable ways. The 2nd measure is confer withing external experts. Experts peculiarly those in the fiscal services industry should explicate the projected returns on investings over a period of clip. Finally, investors should coerce the direction to do the histories public particularly when there are media studies about an improperness by the direction. They should guarantee that they have a timely and accurate position of the fiscal place of their house at any one clip. This will guarantee that houses operate in ethically acceptable rules and deter unethical patterns such as fiscal fraud.