Every corporate scandal that causes drastic consequences in their aftermath emphasizes the need for control and governance. In the case of the Madoff Securities scandal, the centralization of power held by Madoff that created the weakness in internal controls of the company as well as the lack of proper investigation of several red flags by the relevant authorities were essential contributors to the long lasting Ponzi scheme. In the aftermath, the significance of controls has been emphasized by related bodies and a number of standards, frameworks and regulations have been brought into use to prevent the occurence of another massive fraud in the future; such are discussed below.
The most significant problem of the internal control of Madoff securities was that power was centralized on Bernie Madoff and being in charge of several duties performed in the company made it convenient to carry out fraudulent activities. Therefore, the segregation of duties within organizations is further emphasized. One person should not be able to access and be responsible for multiple functions in the company because it will increase the risk of fraud through actions such as misappropriation of assets, misstating financial statements and many more. The utilization of technologies such as software to uncover fraud quickly can also be considered as an effective approach, with the support trained specialists to critically analyze the system on a regular basis (Quisenberry, 2017).
Furthermore, companies have to make certain that their staff are qualified to undertake the tasks allocated to them in order to prevent the carelessness or error that will cause wrongful deception within the firm. The recruitment process and further training of employees can be brought into focus to select appropriate personnel.
Another weakness in the internal control of Madoff Securities is the lack of initiative to detect fraudulent activities by an the independent audit committee within the company. The problem could be fixed by appointing qualified and independent specialists as members of the committee to ensure the accuracy and transparency of company statements and functions (Danquah, n.d.)
One factor that facilitated the operation of the scheme was the close relationship between Madoff Securities and their external auditor, Friehling & Horowitz. The understaffed accounting firm showed a lack of independence and ethical threats of familiarity and self-interest. Thus, the ethical standards of an accountant or any professions should be highlighted to eliminate the failure of performing duties with reasonable care.
Moreover, the U.S. Securities and Exchange Commission's (SEC) negligence on identifying the fraud when tipped off was another reason for the scheme to have lasted for two decades (Steffy, 2008). Consequently after the scandal, the agency enforced new standards and framework to improve thei operations as well as to reduce the risk of the occurrence of potential scandals. According to the SEC's official website (2019), the steps taken by the agency are namely to enhance the safeguarding of investors’ assets; for instance, one such action is to conduct surprise exams by independent accountants hired by the SEC to ensure that the existence of assets in company accounts. In addition, the commission also focuses on improving risk assessments capabilities - particularly, enhancing the information that financial firms submit and increasing the joint effort with other third parties and government bodies to strengthen the examination of any potential risks. Furthermore, there is more strategic planning conducted by the SEC to guarantee the capabilities of staff and their effectiveness with relation to preventing fraud.