How Bernie Madoff Is Teaching EMBAs To Fight Fraud

Bernie Madoff reflecting on his wrongdoings.

MADOFF’S WARNING TO MBAs…IN HIS OWN WORDS

So what does Madoff have to say about the risk of fraud for MBAs? In March, Weber posed this very question to Madoff in lieu of his interview with Poets&Quants. “In my mind, MBAs are probably the greatest population at risk for fraud or unethical behavior, because earnings pressure is so high,” Weber wrote to Madoff. “Do you have any thoughts on this? Are there things that you think could be added to graduate (or undergraduate) curriculum that could help prevent fraud, or make executives more resilient or resistant to a bad decision impulse? Is there any message or thought that you would like to provide to these executives (or future executives?)”

Madoff’s response, delivered an hour later, is stunningly candid.

David,
You are providing a great service to your students. I for one am a terrific example of what you are talking about. For more than 75 % of my career I served on regulatory committees and as consultants to the regulators worldwide. If I became aware of anything it is how LACKING the understanding of both the accounting and legal profession is regarding the very industry they are trying to monitor and regulate. Quite frankly they are ill equipped to perform their obligations. This is not to in any way imply that their own moral compass is at fault nor I am I in any way rationalizing or excusing my own and the other industry population behavior.  David I was surrounded by every level of investor and business executive and I am convinced that FRAUD is rampant at almost every level. I wish I had the knowledge to somehow change this. I think that the often quoted remark of Michael Douglas in the movie Wall Street that” GREED IS GOOD”. Once again this behavior is not limited to the Business world. Look at our GOVERNMENT. I know I sound bitter. Please excuse my own embarrassment and REMORSE.
regards,
Bernie

IS MADOFF A PSYCHOPATH…OR JUST A TORTURED SOUL?

Indeed, Madoff’s response touches on several key motifs in Weber’s courses. Weber harkens back to the importance of due diligence as the cornerstone of curbing fraud. “Clients don’t always tell you the truth,” Weber laments. “The only way you can be comfortable that the client is telling you something that is true is through verification.” Going hand-in-hand with that is resisting the temptation to make assumptions. “You can be affluent, engaging, charismatic —all the things that Bernie is and was. If a single person anywhere along that chain of events had done a verification, the Ponzi Scheme would’ve collapsed years earlier.”

While Madoff preaches education and conscientiousness these days, some are skeptical that he is a changed man. Over the past decade, it has become fashionable to dub some business executives as psychopaths: a-moral, unfeeling self-servers who climb the corporate ladder thanks to being ruthless, manipulative, and charismatic. In some pop psychology corners, Madoff is lumped into the psychopath category. While Weber admits to being neither a trained psychologist nor a Madoff apologist, he has a definite opinion on the matter.

“I don’t think he is,” Weber says. “The reason is that he is showing remorse. Psychopaths could pretend to show remorse. That’s how they’re able to get ahead — they’re able to mirror the feelings of others. In his circumstance, where he has a 150-year prison sentence, why would he have to mirror anything? He’s not in a place where he needs to curry favor with anyone. I take, to a certain degree, that certain things he talks about, including his own feelings, are somewhat legitimate. He’s not looking for our approbation or approval.”

THE RISKS OF FRAUD ARE GREATER THAN EVER

Of course, Madoff, was able to pull off his swindle with low tech computers, a tiny audit firm, a JP Morgan Chase bank account, and the complicity of certain JPMC employees. Could it happen again? With technology becoming increasingly intertwined with all organizational functions, Weber believes the opportunities for wrongdoing have increased exponentially in recent years. One way is through general ledger entries, which previously required the generation of manual ticket that created both an audit trail and a witness. With automation, Weber observes, a change could theoretically be made remotely without manual documentation.

The potential threats from technology are far more than an academic exercise. Circumventing internal controls was also at the heart of the 2012 Libor scandal. Traditionally, securities firms conducted surveillance and required supervision by archiving recorded phone conversations and emails. To get around this, according to Weber, the Libor fraudsters simply re-routed their communication to texts and instant messaging, with the latter requiring the archiving feature to be manually turned on.  Weber notes that all the trading desk phone recordings in the world would not curtail this type of conduct in the digital age. In short, compliance officers must factor rapid changes in technology into any businesses’ risk assessment.

The Libor example also illustrates the risk of unintended consequences with technology. “You have firms where IT people were installing upgrades and they were doing it for the right reasons, to increase automation and productivity,” Weber laments. “This is an example of how you can be brainstorming Section 404 and the worst that can happen and no one in that session would contemplate that instant messaging is going to sink us today. That’s the way that technology has changed compliance. There are little hidden baubles or gifts in every upgrade or every business process.”

Cabo came away with a similar impression after taking Weber’s class. “Fraud has potential to pervade everything,” she warns. “It is very easy to get wrapped up in the nobility of what you do, but you need to be vigilant regardless of what field you are in or how large or small your organization is.” However, Manger views such vigilance as a meager bulwark against human nature. “If you have a narcissistic person coming in to be a bad actor, you can have the best compliance culture and I’m not so sure you can really stop those truly evil people from doing what they want to do.”

Luckily, Manger doesn’t see too many people like that. “It is surprising to me everyday that there are not more Madoffs, to tell you the truth,” she concedes. “What it tells me is that the super majority of people in my industry who manage assets and pooled investments and have complete discretion are good players, not bad actors.”

WEBER’S WHISTLEBLOWING MAKES NATIONAL HEADLINES

Many MBA graduates have yet to face their moment of truth. Business schools rarely dissect scenarios where their reputations will be publicly maligned after an organization turns its entire machinations against them. Weber experienced this first-hand after he blew the whistle on the SEC in 2012. “I became aware of really, really really significant misconduct, including Madoff, but not limited to Madoff. Also, it has now become public involving the compromise of SEC computer systems by foreign intelligence agencies. I was not willing to go along or be apart of a culture that would cut corners.”

NEXT PAGE: A first-hand account of the perils of being a whistleblower.