Bernard Madoff was operating a simple Ponzi scheme, Harry Markopolos explains. ‘He was robbing Peter to pay Paul, so he needed a continual new stream of incoming cash to pay off the old investors’, he says. ‘Investors who got in early would tell their friends and family how great a money manager Madoff was, so they'd want to invest as well.’ The problem is, in a Ponzi scheme there is no underlying investment activity or service provided. It is all, as Markopolos notes, a charade. On the surface, Ponzi schemes offer alluring, steady returns. But the cold, hard truth, as he puts it, is ‘those investment returns exist only on the monthly investment statements because they are fiction’. The returns generated by most Ponzi schemes on paper are so good that if you are not a professional investor you would definitely be tempted to invest 100% of your retirement money in them. It takes tremendous discipline and financial knowledge to successfully avoid them.

Madoff enabled his US\($65\) billion scam by enlisting the apparent complicity of close to 350 ‘feeder funds’ — companies that marketed his Ponzi scheme for him in more than 40 countries and, in effect, fed him with new investors. Those funds all pretended to conduct exhaustive due diligence, such as checking into each manager's background, inspecting his or her operations, verifying the assets, and vetting the strategies. But in reality Madoff paid them handsomely so that they would look the other way. They were accomplices that enabled the scheme to get as large as it did.
Madoff alone could not have been able to reach a US\($65\) billion without their help.

Required

Evaluate the case from an audit point of view, highlighting possible risks for an investor and a fund manager who might be attracted to such a scheme.