Fraud Triangle

In an attempt to understand the factors behind Madoff’s fraudulent actions, the elements of the fraud triangle will be applied. Originating from Donald R. Cressey’s hypothesis, it attempts to elaborate on the reasons that led to people committing fraud in the workplace (Association of Government Accountants, n.d.).

Situational pressure

The element of situational pressure involves the motivational drive to commit fraud (Association of Government Accountants, n.d.). In Madoff’s case, a possible driving factor was the Black Market in 1987, whereby stock markets crashed in a short period of time. This led to the company gaining lower returns and eventually pressured Madoff to borrow from investors’ capital to pay foregoing investors – this actions of his continued and eventually snowballed in size into a Ponzi scheme. In an admission made by Madoff (2019), he claimed: “… I felt compelled to satisfy my clients’ expectations, at any cost”; which provides a sense that his actions were motivated by the need to not only meet external expectations, but also personal gain. This supports Brennan & McGrath (2007) who observed that influencing share prices as a motive to commit fraud was highly likely in US and European cases.

Available Opportunities

To be able to commit fraud, there must be an opportunity that is able to be identified and taken advantage of. Firstly, Madoff’s impeccable reputation acted as a key for him to earn the trust and respect of regulators and investors. Notably, his title as non-executive chairman of NASDAQ allowed him to form connections; and this possibly led to responsible parties being complacent with him. As a result, Madoff exploited this trust. Moreover, Madoff did not lack clients – some of which were reputable and wealthy and was drawn to his charisma and the charm of his supposed profitability (FRONTLINE, 2009). This allowed him to continue on with his Ponzi scheme for a period of time as he was easily able to find investors. Lastly, poor internal controls and too much power held by Madoff as well as the lack of independence by the external auditor gave Madoff the opportunity to hide his scheme; due to little to no skepticism. Dellaportas (2013) argued that opportunities are key to controlling the fraud, and this is consistent with some of the opportunities listed above.

Personal Characteristic

The context of personal characteristics refer to the attitude or the attempt of a person to rationalize the act of fraud. In an article written by Hudson (2011), an interview with Madoff offer some insight as to how he does this. Notable justifications that he made were that his investors trusted him with their money despite him wanting to return it back, and that it was their fault for trusting him despite all the red flags. Furthermore, he claimed that none of his clients were actually brought to the extremities of poverty by his actions.