Skip to content

FRM Part II · FRM Exam Part II · Madoff: A Riot of Red Flags

Which structural feature of Madoff's operation most directly allowed the fraud to persist for decades without detection by clients?

The key feature was lack of segregation of duties: Madoff's firm was adviser, broker-dealer, and custodian at once, audited by a tiny unknown firm. With no independent check on trades or assets, fabricated statements could go unverified for decades.

  1. AThe same firm acted as investment adviser, broker-dealer executing trades, and custodian of assets, with a tiny, little-known auditorCorrect
  2. BAssets were held by several independent global custodians who reconciled daily
  3. CTrades were executed through multiple unaffiliated brokers on public exchanges
  4. DInvestors received independent third-party valuations of all positions

Explanation

Concentrating advisory, execution, and custody inside one firm removed independent verification of trades and assets. A three-person audit firm compounded the weakness. The other options describe controls that were absent.

Did you get it right without looking?

One question tells you little. A timed set on Madoff: A Riot of Red Flags shows your real accuracy, how long you take and where you lose marks.

Practise Madoff: A Riot of Red FlagsFree diagnostic mock

More Madoff: A Riot of Red Flags questions