The Case Of Allen Stanford

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Allen Stanford was, at one point, a successful entrepreneur whose investment company’s accounts totaled in the billions. The aforementioned keyword is ‘was.’ As CEO of Stanford Financial Group, Stanford essentially ran a massive Ponzi scheme; he issued certificates of deposit at an offshore bank that he controlled and illegally used the investors’ funds. These CD’s were appealing to investors due to their high returns of nearly twice the average rate of return of investments in U.S. banks. Investors were led to believe that these CD’s had such high returns because they were being invested in corporate stocks, real estate, hedge funds, and precious metals (BusinessWeek). The SEC eventually uncovered Stanford’s fraud in 2008. Stanford was …show more content…
In 2007, Stanford’s various companies were running net operating losses of over $30 million (Madoff). Stanford had to personally keep the company afloat. The complaint against Stanford alleged that, “70% of its 2007 operating revenues through referral fees earned from SGC’s sales of SIBL CDs.” BDO did not verify the existence of these CD’s or Stanford’s assets or income. The success of the company was riding solely on the sale of certificates. If BDO fulfilled its obligations of verifying existence, completeness, and correct valuation of these CD’s, an unqualified opinion would have been impossible. Investors’ auditors would have been able to see these red flags and BDO would have been able to detect that the securities were not able to bring in a profit by performing analytical procedures. BDO also did not correctly assess risk. Inherent risk was present because of management’s objections and increasingly ineffective investing. Independent controls testing was also necessary but not implemented. Part of BDO’s responsibility was to test the internal controls and confirm that the funds intended to purchase the CD’s were used for that purpose. Instead, BDO concealed such information and contributed to the fraud (PonziBook).

If I were to advise clients regarding investing in off-shore banks like Stanford’s, I would refer to the statement, “If it seems too good to be true, it probably is.” Stanford’s rates were double the average 2%
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