The beginning of the article covers historical examples of Ponzi schemes that were perpetrated in New York State. Specifically, Patrick Bennet, John McNamara, and Nicholas Cosmos.

Patrick Bennett
Bennett Group of Syracuse was the front for Patrick Bennett in which he recruited 10,000 investors, the majority of which were elderly, and defrauded them for an amount of more than $600 million.

John McNamara
Used a Ponzi-like set up to establish fake businesses in multiple locations across the globe, in order to swindle over $436 million through financing of nonexistent cars. Internal auditors detected McNamara’s fraud.

Nicholas Cosmo
The principal for Agape World Inc, encouraged investors to reinvest their dividends into the fraudulent fund in order to increase the amount of money he made. The Agape fund was flaunted as being a private fund for construction, but was instead being pocketed in large amounts by Cosmo.

These three examples are effective in demonstrating that with attention to the details and reading between the lines during audits, auditors can be successful in detecting and reporting fraudulent behaviors. According to Allan Brown, director of internal audit for the colleges of the State of Louisiana,

At a minimum, auditors should be alert to: whether or not the investment exists; its value, if material; the collectability of the investment; and the rate of return… [T]he rule of thumb is this: If the investment is not easily understood and is a material balance sheet and/or income statement item, it should be examined by experts; it’s that simple. (Wells 6)

The foremost red flag identified within this article is the promised return on investment. The author briefly discusses Bernard Madoff, perhaps the most notorious Ponzi schemer in current times. Bernard Madoff was able to continue a Ponzi scheme for over a decade, but was eventually discovered through auditing. Madoff’s scheme was detected through the use of trends in ratios. Typically an investment will have highs and lows, in congruence with the trends in the market typically, but Madoff’s investments were not fluctuating with the market.

The article reports that for CPA’s, tracking and careful investigation into the return on investment measures, as well as red flag indicators will significantly help identify Ponzi schemes during audits. In addition, the article lists how CPAs can educate individual and businesses on Ponzi schemes, in order to decrease the amount of people being “duped” into fraudulent activities.

CPAEDu

The article gives multiple historical examples of Ponzi schemes, a few were mentioned in the review but many were omitted from the review. The examples effectively demonstrated the range of investments that can be considered Ponzi schemes. The author, Joseph T. Wells, is a CPA and a Certified Fraud Examiner, as well as the founder of the Association of Certified Fraud Examiners.

 

Wells, Joseph T. “Ponzis and Pyramids: What CPAs Need to Know.” The CPA Journal(2010): 6-10.