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Madoff Scam Proves Wall St. Incompetence

Drastic regs needed, and be sure financial firms will resist

By Kevin Spak, Newser Staff

Posted Dec 17, 2008 2:20 PM CST

(Newser) – If the Bernard Madoff scandal teaches us anything, it’s that Wall Street’s masters “aren’t just too clever by half,” writes Steven Pearlstein in the Washington Post, “they’re not clever at all.” They didn’t just get “bamboozled by a con artist,” they also enthusiastically delivered him their friends’ and relatives’ money—never asking why Madoff’s books were audited by three guys in a broom closet in Long Island.

The Madoff scandal is the latest in a long line of cooked-book scandals, from Enron to the credit meltdown. “It doesn’t take a PhD in finance to see the pattern,” says Pearlstein. Accounting firms and rating agencies have built-in conflicts of interest because they’re paid by the people they’re supposed to be watching. “After a decade of these scandals,” Pearlstein stews, “something needs to be done.”

[Images (2)]

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Bernie Madoff's scam is yet more proof that accounting and rating agencies shouldn't be paid by the people they're supposed to be watching.

SEC Chairman Christopher Cox testifies on Capitol Hill in this file photo. Cox has blamed his career regulators for failing to investigate Bernard Madoff. (AP Photo)

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In Madoff's case, there seems to be little doubt that competent and uncompromised auditors would have quickly discovered that the firm's investment arm was paying out returns it didn't earn.
- Steven Pearlstein

After a decade of these scandals, something needs to be done to restore the public's faith in financial markets. - Steven Pearlstein

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Thinker

Dec 17, 2008 3:38 AM CST

In 1993 I worked as an internal for the third largest finance company in the country. We were informed, at that time, that we were no longer supposed to "audit" them; rather, it would be "self auditing" be each department, and we would be team leaders. We knew it was a bad idea at the time, but who listens to the auditors? In 1996, I worked for Arthur Andersen as a high-paid consultant/auditor for many Fortune 500 clients. During audits, I would come up with numerous findings, and they would be shot down by my bosses. I was told to remove the findings from my reports. They were our clients, after all, and we couldn't offend them. The partners made $$$ by keeping clients, not offending them! I quit consulting, and now I work as a low paid secretary. For an ethical firm. And I'm happier.

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Madoff Scam Proves Wall St. Incompetence