Question

We studied a number of different businesses that collapsed due to fraud but the difficulty was in early detection. For the following case respond to the question and identify the effects on the financial statements and any concerns you may have. Also please note if you see any similarities to any of the companies we studied.

CCM has many contracts that are long term and cross over reporting periods. They report their earnings before interest and taxes by prorating completed contracts and releasing the revenues and matching costs into each period. This proportional reporting has come under question from their auditors since they are concerned since none of the revenue is received until the end and there are many disputes about the eventual price due to a clause that allows price adjustments. They are considering reporting two versions of their earnings numbers.

  

2. Compare and contrast Charles Ponzi and Bernie Madoff and their two Ponzi schemes. Why wasn’t Madoff’s scheme discovered earlier? (3 marks, 150 word limit)

Answer 1

GOING BY THE FIRST PART OF THE QUESTION.

on the basis of the available data, CCM has many contracts, the reporting system has been questioned by their auditors , because of the following reasons and concerns, let us understand what could be the possible considerations,

the Auditor may be concerned that the firm is overstating the revenue becuasue my the current system of recognition it violates the accounting standard of reveneue recognition, also by this methodolgy of the reporting structure the ie. the proportional reporting standards, the question is what if the revenue was not recv until the year end and the consequences of the same, so i believe it could turn out to be a ponzi scheme or overinflation of the firms ebit, and sales in case the contracts do not prove to be solid

COMNIG TO THE SECOND ASPECT TO THE QUESTION.

THE CHARLES PONZI AND BERNIE MADOFF.

CHARLES PONZI became known in the early 1920s as a swindler in North America for his money-making scheme. He promised clients a 50% profit within 45 days or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the U.S. as a form of arbitrage.

NOW HOW WAS IT DIFFERENT FROM THE PONZI SCHEME OF BERNIE MADOFF

MADOFF managed to fly under the radar for so long because he was a wel versed an and active member of financial industry, started his own market firm in 1960 and helped launch the NASDAQ stock market. He really only made 20 billion and cheated clients out of 65 billion