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Published on September 25th, 2013 | by Pete


Ponzi Schemes and Forensic Accountants

What Is a Ponzi scheme?

A Ponzi scheme is one of the oldest fraud strategies in the book. The scheme would normally prey on newbie investors who are looking to make a large profit without taking such a large risk. The investment portfolio for such a scheme mainly leans on risky investments such a derivatives. Some other times, there are no investments. The scammer pockets all the investment money. The scheme is kept alive by luring new investors into the scheme. The scheme eventually collapses when the new investors ask for their returns that may be in the form of profits or dividends. The collapse is also because of the fact that there are no real assets. If any assets exists, most of the time they are extremely overvalued.

The Largest Ponzi scheme


One of the largest Ponzi schemes in the history of man was engineered by Bernard Madoff. The financier defrauds investors of close to seventy billion dollars. What identified this crime as a Ponzi scheme was the fact that he took the investor’s money and used it to finance his personal lifestyle. To cover up for the disappearing money, Madoff falsified financial statements (Sawhney, 2010). By doing this, he managed to fool the investors into thinking that the investment was working well. He then used the money brought in by new investors to pay the older investors their dividends. The scheme, just like any other Ponzi scheme eventually collapsed, and it was figured out.


Enter the Forensic Accountant


A forensic accountant has the skills to identify a Ponzi scheme.Forths Forensic Accountants have good credibility to solve Ponzi frauds. Once a Ponzi scheme is identified, such accountants are called in to identify any tell-tale signs that would fully detect the scheme. However difficult it is, forensic accountants are skilled in detecting Ponzi schemes. By following the cash movement, they can identify whether there is a Ponzi scheme or not. They do this by analysing the scheme’s cash flow (Sawhney, 2010). A Ponzi scheme is used to fool investors that they are investing in a high yielding financial instrument. A forensic analyst can identify the complex cash flow that the scammer uses to drain the investments.

Dissecting the Cash Flow

A forensic Analyst uses various data to reconstruct the movement of cash. The analyst uses the bank slips, cheques, deposits, and statement. These documents provide a financial analyst with a map of the movement of cash. This map clearly shows the movement of cash from the investor to the scammer. Sometimes the older investor gets a share of the new money and at other times, the scammer pockets everything. Analysing and clearly dissecting the cash flow, the forensic accountant is capable to wrap up such an investigation (Sawhney, 2010).


Completing the Investigation


Even with all the information and data available, it requires a trained discerning eye to identify the holes in the project. The Forensic accountant provides a general picture for other investigators who are participating in the investigation. If there were other crimes that were involved with the Ponzi scheme, the accountant’s analysis is also able to shed light into these other possibilities. This clearly shows that the forensic accountant is a crucial cog in the wheel that crushes the Ponzi scheme.


The Forensic Accountant versus the Ponzi scheme


A forensic analyst faces one of the most challenging jobs. This is because of the complexity of the issue that requires solving. Most times, the investigation process encounters several bumps. Either a document missing here or a witness missing. The advantage of having a forensic analyst is that they can make sense of information even when it lacks crucial elements. This is also an advantage during the court proceeding. The forensic analyst is capable of guiding the jury through the complex information in a way they can clearly understand.


Good day everyone! My name is Ted Hansen; I like analyzing numbers and applying finance concepts to real life situations. I recently started blogging, to communicate my ideas to others at Forensic Accounting. Today I will be enlightening you regarding the significance of Forensic Accountants and Ponzi schemes. Hope it is a helpful read.


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