Madoff Case Essay

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Case 1.12 3. A “peer review” is an examination of an accounting firm’s quality control system and its compliance with the requirements of that system by one or more accounting professionals. Because Friehling & Horowitz’s audits of Madoff Securities were, in fact,” “sham audits”, then a thorough peer review would have revealed that those audits were false and misleading. The resulting peer review report filed with the relevant regulatory or oversight body would very likely have resulted in Friehling & Horowitz Being disqualified as Madoff’s audit firm. 4 Three conditions that are usually present when financial fraud occurs is the fraud risk triangle, the existence of an incentive and/or pressure to commit a fraud, the opportunity to commit a fraud is present (typically due to ineffective internal controls), and the ability to rationalize fraudulent conduct on the part of the given or potential fraudster. The phrase “fraud risk factors.” These factors are events or circumstances or “conditions” that indicate that one or more of the three elements of the fraud triangle are present. A few examples of fraud risk factor are a high degree of competition in industry which force or pressure individuals to commit fraud, negative cash flows, and significant related party transactions. 5 • Requiring independent auditors to immediately report suspected fraud to regulatory law enforcement • Establishing a government audit agency to “take over” the independent audit function. In • More rigorous and intense training programs to ensure that government regulators, such as SEC personnel, have the proper background to carry out their oversight responsibilities. • Educational programs intended to help investors spot investment opportunities that are “too good to be

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