Friday, 20 February 2009

More On Audit ...

I see a pattern emerging.

First we have a Ponzi scheme. It doesn't matter what the content of the scheme is, it needs to be just credible enough to part people from their money through a possible - but highly improbable - investment scheme. You then create a money funnel where the receipts from later entrants go to fund the payments to earlier entrants, who may not want cash anyway as they can be persuaded to let their paper gains ride on the casino.

You may attract the attention from whistleblowers along the way. If they are external, then that's just sour grapes from incompetent competitors, if they are internal, then get rid of them. You will need accounts to lodge with the regulators, so a compliant auditor would also be helpful. And so the money goes around until it crashes to a halt - a crash caused by the collapse of the property market or the stock market, perhaps? And then the scheme comes into the open.

This business model fits the scheme of Bernie Madoff (see report), it may well fit the scheme of Allen Stanford (see report), and it has an unbearable likeness to the case of HBoS described in a previous post (see post). In the latest case to hit the headlines - that of Stanford International Bank - it appears that we have internal warnings that served as resignation letters and a small firm of auditors who gave SIB an unqualified audit opinion (see report). this all hightens the need for the reform of the audit community.

However, it is easy to blame others and we need to confess our own culpability. The fraudster needs the victim (I believe that they are called the 'Marks'). If we all were less willing to believe the improbable, it would be more difficult to perpetrate the fraud. If we all gave up trying to find an 'edge', then it would be difficult to sell high risk schemes. If we all said that what we had was enough - to become satisficers rather than maximisers - then these schemes would never gain sufficient momentum to grow.

On my part, I groaned when I read that the auditor of Stanford International Bank qualifies where I did, albeit 15 years earlier.

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