On the money with Gavin Hinks
While Madoff was the inspiration for massive fraud, like all good CFOs, Frank DiPascali was the technician that made things happen
Frank DiPascali’s name will live long in infamy. He was the right hand man
and CFO of Bernard Madoff who last week pleaded guilty to numerous charges for
his part in the $65bn (£40m) Ponzi scheme. Read the complaint brought before the
US courts and you soon see that, while Madoff may have been the inspiration,
like all good CFOs, DiPascali was the technician that made things happen. He
devised the fictitious investment strategy – the now notorious split-strike
conversion – and concocted the means by which millions of phony and forged
documents could be manufactured to fool investors, auditors and regulators.
But they were only fooled because of a willingness to accept documents and
verbal accounts at face value. Given how many sham documents were produced, that
amounts to a massive collective failure.
There is nothing complicated in this – auditors, regulators and potential
investors completing due diligence needed to check with counterparties that the
documents were real and reflected actual transactions.
There’s a lesson here, and I suspect it is a lesson to be drawn from Satyam
and its vast invoice factory too – auditors and regulators cannot afford to take
documents at face value. Their veracity needs to be established.
Why that didn’t happen in the Madoff case is anybody’s guess.
One explanation is that he managed to conceal the true scale of the deposits
he was taking, so no warning bells were sounded. Even so, basic checking could
well have revealed much earlier that his trades were a sham, for the simple
reason no one Madoff said he did business with could have verified that they
were a counterparty.
If you grasp the scale of Madoff’s deceit, you grasp the enormity of the
embarrassment of the US authorities. But auditors and regulators take heed.
DiPascali’s achievement is your wake up call.
Gavin Hinks is editor of Accountancy Age