Bernie Madoff was best known in the business of market-making as a pioneer and was the founder of Bernard L. Madoff Investment Securities. Clients invested their money through feeder funds sent to Madoff to manage as low-risk investments and generate stable returns. However, he was not licensed to conduct these investment funds; in 2008, Madoff told his sons that the advisory business was a fraud and admitted to having continued to defraud clients for over fifty years for up to 50 billion dollars. Madoff pled guilty in 2009 without a trial and was sentenced to 150 years in prison; many organizations and wealthy clients whose investments were managed by Madoff lost their savings. A fraud is committed intentionally by a perpetrator to gain assets or monetary value if the three conditions which are incentives to commit fraud, the opportunity to do so and rationalization by the individual committing the fraud exist. These three conditions are referred to as the fraud triangle and must be present for fraud to occur.
The Fraud Triangle elements were created by Cressey during his study in criminology, particularly in detecting how fraudsters behave. Analyzing these elements with respect to Madoff’s fraud case, the opportunity existed for Madoff to swindle his clients of their investments as he was the head of the company. What motivated the fraud was the fact that Madoff wanted the continued success of the company in order to earn more income by attracting more clients. Moreover, he rationalized his fraudulent moves by the very fact that his clients were getting the required returns in the present and hoped to reach the reported assets in the future (Asare, Davidson, & Gramling, 2008). Finally, the scheme collapsed primarily due to the fact that money paid to investors was more than the actual earnings that the company made. It is important to study fraud as one acquires the knowledge to detect and prevent fraud in the business and various organizations as it has adverse consequences. As a result, money lost is recovered and prevents future losses from occurring in the firm. Additionally, it helps restores the company’s culture and values which translate in customer attraction and retention in the business. Thusly, the knowledge of fraud can be said to benefit stakeholders far beyond the accounting department.
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Crime causation focuses on various theories of crime and provides elaborations on how individuals learn to engage in crimes. There are three theories that explain the criminal behavior of a perpetrator and these could be expressed from biological, sociological and psychological points of view, playing a very significant role in the expression of behavior by a person. These theories describe the crime in different groups as influenced by various features to different people depending on exposure and environment of an offender (Ellis, 2005). Knowledge of fraud is of the essence in any business as it helps uphold values in a company and increase the level of confidence in the business to stakeholders. As a result, high ethical values govern the conduct of any employees, building their loyalty and consequently improving the performance of the business in the market. In addition, accounting standards have been established, which will ensure that fraud drastically reduces to promote an honest environment for conducting business.
Identification of the cause of accounting fraud is necessary as it helps in detecting perpetrators and also prevent future fraud. Also, it provides ideas for better internal controls and enhances structuring. An investigator is able to determine which questions to ask during the interview with different suspects. If one can identify the loops which the perpetrators take advantage of to conduct fraud, then it is easy to establish the extent of the activities carried out without the knowledge of the company managers (Frank, & Richard, 2015). However, it is harder to determine the cause of fraud when the executives who can overrun the company’s policies are involved in such schemes. In the case of Madoff, he was able to get away with fraud for many years since he was the top manager in the business. Although it would eventually be exposed, it takes more time to identify fraud in a business where the top managers are involved.
Fraud can happen anywhere, and its prevention is of great importance in ensuring success and transparency in businesses. As mentioned above, fraud results from three factors; opportunity, motivation, and opportunity. To prevent and reduce fraud, effective strategies that decrease opportunity and motive should be established. Also, methods that reduce the ability of the perpetrators to rationalize their actions and those that restrict opportunity. To achieve this, businesses should introduce policies, training and fraud awareness activities, and establish controls and procedures (Asare, Davidson, & Gramling, 2008). In the contemporary society, innovative technology has been incorporated in auditing and accounting to ensure auditors are effectively trained to detect frauds. Forensic investigation in accounting is one of the recent developments which has proved to be a useful tool in detecting frauds. This will make sure that unlike in previous cases, fraudsters are easily traced by auditors. It will also lead to a significant reduction in frauds and increase success in businesses.
References
Asare, S. K., Davidson, R. A., & Gramling, A. A. (November 01, 2008). Internal Auditors' Evaluation of Fraud Factors in Planning an Audit: The Importance of Audit Committee Quality and Management Incentives. International Journal of Auditing, 12, 3, 181-203.
Ellis, L. (July 01, 2005). Theories of Crime Causations Explaining Psychological, Social, and Biological Correlates of Criminality. European Journal of Criminology, 2, 3.)
Frank, S. P., & Richard, G. B. (January 01, 2012). The optics of fraud: affiliations that enhance offender credibility. Journal of Financial Crime, 19, 3, 305-320.
