Case 3.6 Bernard L. Madoff Investment and Securities: Understanding the Client’s Business and Industry Copyright © 2014 McGraw-Hill Education. All rights.

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Case 3.6 Bernard L. Madoff Investment and Securities: Understanding the Client’s Business and Industry Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Madoff Case Relevant Technical Knowledge PCAOB AS # 8 – Paragraphs #5-8 Risk of material misstatement at the assertion level consists of the following components: Inherent risk, which refers to the susceptibility of an assertion to a misstatement, due to error or fraud, that could be material, individually or in combination with other misstatements, before consideration of any related controls. Control risk, which is the risk that a misstatement due to error or fraud that could occur in an assertion and that could be material, individually or in combination with other misstatements, will not be prevented or detected on a timely basis by the company's internal control. Control risk is a function of the effectiveness of the design and operation of internal control. Inherent risk and control risk are related to the company, its environment, and its internal control, and the auditor assesses those risks based on evidence he or she obtains.

Madoff Case Relevant Technical Knowledge PCAOB AS # 12 – Paragraphs 7-10 The auditor should obtain an understanding of the company and its environment to understand the events, conditions, and company activities that might reasonably be expected to have a significant effect on the risks of material misstatement. Obtaining an understanding of relevant industry, regulatory, and other external factors encompasses industry factors, including the competitive environment and technological developments; the regulatory environment, including the applicable financial reporting framework and the legal and political environment; and external factors, including general economic conditions

Madoff Case Relevant Technical Knowledge Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Title IX: Established a whistleblower program to produce tips about securities fraud Improved the management of the SEC Required the Government Accountability Office (GAO) to oversee the SEC

Psychology Literature - How to Best Acquire Knowledge Feature Repeated Case Experiences with Feedback; and Teach Technical Concepts within Real-Life Contexts Consider the following additional cases: Madoff: A Focus on Auditors’ and Accountants’ Legal Liability Madoff: Broker-Dealer Fraud Madoff: The Role of the Securities and Exchange Commission (SEC)

Epilogue - Madoff In March 2009, Bernie Madoff pleaded guilty to 11 different federal felonies, including securities fraud. On June 29, 2009, Madoff was sentenced to 150 years in prison, the maximum penalty allowed by law.

Epilogue - Madoff On December 11, 2010, Bernie Madoff’s son Mark Madoff committed suicide at the age of 46, 2 years to the day of his father’s arrest in 2008. In November, 2009, David Friehling, Madoff’s CPA pled guilty with a maximum sentence of 108 years. As of September, 2013, he remains out of jail as he continues to cooperate with the ongoing federal investigation.