The economic crisis in Europe and earlier credit crisis during 2008 have opened up the debate on the role of auditors and the corporate houses are carrying out their activities. The 2008 mortgage crisis resulted in many financial companies going bankrupt while some closing down permanently. The effect of crisis was felt world-over and one Indian company, Satyam Computers went bankrupt and this is a particular case where the role of auditors from PriceWaterCoopers House, India was questioned (The Indian Express, 2012). Larsson (2005) stated that major corporate frauds and scandals are regularly followed by the debate concerning the aim and scope of auditing. While there were such scandals earlier, this paper analyses one such corporate scandal and how it has affected and changed the profession of auditors in coming years.
Company Overview – Hedge Fund Scandal
In 1996, Samuel Israel founded the Bayou Hedge Fund Group with a capital of $450M funded by investors. Since its inception, Mr. Israel lied to the investors and investors’ funds were diverted to his personal account as he indulged in a series of cover-ups and a web of lies never forgotten in the history of hedge funds in the United States of America (Muhtaseb, 2010).
Mr. Israel was sentenced to 20 years in jail for fraud among other charges and got additional 2 years jail term for faking a suicide attempt in order to skip investor fraud charges in court. Mr. James Marquez, Co-founder of Bayou Hedge Fund Group was sentenced to 4 and half years in prison for his role in the fraud that saw investors loose more than $350 million. The district Judge Coleen McMahon held that his creation of a sham accounting firm together with Daniel Marino and Samuel Israel led to a massive Ponzi scheme. In 2005 Daniel Marino Bayou Hedge Fund Group’s Chief Financing Officer pleaded guilty of several charges of conspiracy and fraud among others. Dan Marino was sentenced to 20 years of jail time alongside Bayou Hedge Fund Group president Samuel Israel (Cauley and Rauscher, 2009).
Various Causes of the Scandal
This section analyses some of the causes triggering the scandal. Some of causes explained below range from selection of board members, management inefficiency, auditor’s role and other causes.
As seen from the sentences faced by the group’s management officials, it is clear that the Bayou Hedge Fund Group did not have a competent Board. According to Grant and Visconti (2006), various scandals have been blamed on different factors such as unethical behaviour among executives, incentives to manipulate financial information for personal gain and lack of independence among monitors. The Board members in this company were Mr. Israel, Mr. James Marquez his Co-founder and Mr. Dan Marino the Chief Financial Officer who were involved in investor funds withdrawals and gross misappropriation of investor funds. Sam Israel having an upper hand in the shareholding of the Group, made several independent decisions regarding day decisions with no oversight body to check the activities of day to day activities. Sam Israel and his Co-founder of the Bayou Hedge Fund Group were neither experienced nor qualified in managing investor funds. (Holton et al, 2010).
During the Bayou Hedge Fund Group Public trial, Mr. Israel’s criminal past was unveiled, which any investor that could have tried to counter check with the Legal arms could have found out. A former employee filed a federal lawsuit claiming violations of SEC regulations of Hedge funds and the matter went into arbitration (Berkman et al, 2008). Grant and Visconti (2006) further mentioned that corporate boards have failed to represent shareholder interests adequately and exert scrutiny over incumbent management. The Bayou Hedge Fund Group board reveals structural weaknesses including the combination of the positions and lack of autonomy.
Management Weaknesses – Fraudulent management practices
Managers receive incentives in various forms on meeting performance expectations which may sometimes result in accounting fraud because Ball (2008) believes that non financial motives are more powerful and are dominant reason for committing accounting fraud. The Bayou Hedge Fund Group scandal broke out when Arizona regulators seized $100 million from Karl Johnson who had held this money on behalf of Mr. Israel for the purpose of investing in Bank Instruments that would yield over $7.1 billion in over 10 years. At the time of the seizure, the regulators did not have an idea of what was going on. Bayou Hedge Fund Group had in the previous year passed a Board resolution that Mr. Israel its president should hold $100Million in his own name for offshore investments (Muhtaseb and Yang, 2008). Mr. Israel regularly sent emails briefing to investors and true to this acquired trait, and sent emails to his clients informing them closing the fund operations to spend time with family and that investors would get their funds in mid-August which was the last communication to Bayou Hedge Fund Group clients and since then the investors never got their funds.
- Quote paper
- Carol Nganga (Author), 2012, Corporate Scandal and Impact on the Audit Profession, Munich, GRIN Verlag, https://www.grin.com/document/280534