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What hasn’t been said about the Madoff firm running a $50 Billion Ponzi
Scheme? There is no statement nor discussion of how to keep it from
happening again. To do that, put the finger on the underlying problem.
Starting question: how did the Madoff scam continue for years and years? After all, Madoff operated in a super-regulated, super-overseen
environment. Look at the layers and watchers policing those companies.
First, any investment company of any size must have an outside auditor.
Second, the National Association of Securities Dealers (NASD) “oversees” its members; they too can examine the books and business practices. Third, the Securities and Exchange Commission (SEC) is the federal regulatory body. Fourth, the Securities Investor Protection Corporation (SIPC) insures investment accounts against theft and fraud for the same amount which the FDIC insures bank accounts. Last, ultimately, the Congress is the originator of the laws authorizing the cascade of regulations to protect all parties.
The entire “system” failed time and again at every step. For the securities industry, the policing of Madoff is rather like the handling of Hurricane Katrina. Just picture President Bush (or Clinton) saying to the head of the SEC, “Brownie, you’re doing a hell of a job!” That sarcasm and contempt can be directed to all levels, as “Congress people, you do a great job for people like Bernard Madoff!”
At the ground level of the system, there is the run-of-the mill policing of a company that should catch shenanigans. That is done by an outside independent and competent accounting firm. They match a random sample of accounts and transactions. They “follow the money.” But, the firm auditing the Madoff firm could not have missed every irregular exception all the time, could they? Wouldn’t you think something would have shown up by the time the first billion went unaccounted for? Well, the audit function failed. (This is not rocket science, is it?) The auditing firm may simply be neither independent nor competent. One reasonable solution would be to require by law that a new audit firm be selected every year or two. And, why not have the SEC give Madoff a choice of 3 randomly selected audit firms?
At the next level, the SEC and NASD are also police. The job can be as
simple as policing the auditors. The first step would be to inspect the
audit report in the comfort of their offices. A second step would be to
receive complaints about the Madoff firm. The SEC says they’ve been
receiving allegations for over ten years, but did nothing. Even if there
had been perfect audit reports and no allegations, a third step would be
expected, just a reality check to police the police. That third step by the SEC would be to run an annual mini-audit of their own. But, wait, the SEC head says the SEC hasn’t looked at the Madoff firm for at least ten years. What more do we need to know? Eureka! Let’s stop here. Until this system defect is solved, there will be more Madoff scandals, more Ponzi schemes. And, even outright theft can go undetected most of the time for years and years at a time.
This is definitely not rocket science. Has anyone else come up with this as a solution? If you’ve seen it, please take a moment to post it as a
comment. And if you haven’t seen it, please comment on this analyis. The feedback makes it all worthwhile. Today, the words of Lily Tomlin come to mind: “No matter how cynical you get, it’s almost impossible to keep up.”
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