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."