Auditing Due Diligence in Law and Ethics: The Ponzi "Feeder Fund" Cases

By Spalding, Albert D. | Review of Business & Finance Studies, January 1, 2012 | Go to article overview

Auditing Due Diligence in Law and Ethics: The Ponzi "Feeder Fund" Cases


Spalding, Albert D., Review of Business & Finance Studies


ABSTRACT

Financial accounting is an information conveyance process. When financial auditors issue an opinion in regard to financial statements, the auditors are providing assurance that those financial statements fairly represent the entity, and are prepared in accordance with the relevant standards. If there is a problem with the financial statements for which an unqualified audit opinion has been issued, the auditors may be questioned in regard to their compliance with professional technical and ethical standards that require competency, honesty, and full disclosure. These questions may be asked by the auditors' professional organizations, such as the American Institute of Certified Public Accountants (AICPA), by government regulators who authorize the performance of auditing services, and by the judges and juries of the judicial system. This paper considers how the judiciary, in particular, takes into account auditors' technical and ethical standards when auditors are sued for professional negligence and negligent misrepresentation. This investigation is done within the context of the recent lawsuits against auditors of "feeder funds" that invested with Ponzi scam artists such as Bernard Madoff. This paper concludes that the auditing profession has a "teachable moment" in the wake of the feeder fund failures, and should not overlook this opportunity to upgrade its ethical standards.

JEL: K23; M42; M48

KEYWORDS: Auditing, financial disclosure, due diligence, negligent misrepresentation, accountants' liability, professional ethics, Ponzi, feeder funds.

INTRODUCTION

Financial auditing is a professional discipline that requires both the technical skills and ethics. In the United States, the technical skills include both a thorough understanding of generally accepted accounting principles (GAAP) employed by the audit client, and rigorous application of generally accepted auditing standards (GAAS) in order to ensure that the auditors' opinions are reliable. Auditors must also adhere to rigorous standards of due diligence, honesty and full disclosure in order to ensure that the auditors' opinions are trustworthy.

This paper provides a discussion of skills required of auditors. This paper considers how the judiciary, in particular, takes into account auditors' technical and ethical standards when auditors are sued for professional negligence and negligent misrepresentation. Specifically, we discuss the issue in relationship with the ? ernie Madoff fraud case. In the following section the relevant literature and background are provided. The paper continues with a discussion of Ponzi feeder funds. The next section provides a discussion of red flags in Ponzi feeder fund audits. This paper continues with sections on legal and ethical analyses of auditor due diligence. The paper closes with some concluding comments.

LITERATURE REVIEW AND BACKGROUND

Several systems operate to evaluate and assess financial auditors' skills and ethics. First, financial auditors attempt to self-regulate through organizations such as the American Institute of Certified Public Accountants (AICPA) and affiliated state accounting societies. These organizations monitor member compliance with the AICPA code of professional conduct and related industry-generated pronouncements. The AICPA maintains a joint ethics enforcement program that investigates complaints about members who may have violated professional standards. When investigators conclude that members have in fact failed to comply with these standards, disciplinary actions ranging from enhanced continuing education requirements to suspension or termination of membership are enforced.

State regulators provide a second tier of oversight. Certified public accountants are licensed by state licensure agencies who require licensees to abide by state laws and regulations designed to make sure that they are performing reliable and ethical services. Unlike the AICPA and state professional societies, whose primary objective is the enhancement and survival of the profession, state regulators are more concerned with protecting the interests of businesses and consumers who rely upon the services of these professionals.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Auditing Due Diligence in Law and Ethics: The Ponzi "Feeder Fund" Cases
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.