Pyramid Scheme Case Study
Start the question by defining a Ponzi and a Pyramid scheme;
A Ponzi Scheme:
"A con artist offers obligations that promise very high returns at seemingly very low risk from a business that does in fact exist or a secret idea that does not work out. The con artist helps himself to the investors' money, and pays a promised high returns to earlier investors from the money handed over by these and later investors. The scheme ends when there is no more money from the new investors"(Frankel, 2009, p.2)
A Pyramid scheme:
"An illegal investment scam based on a hierarchical setup. New recruits make up the base of the pyramid and provide the funding, or so-called returns, given to the earlier investors/recruits above them." as reported by …show more content…
Some of his professional investment company clients even said that the reason why they invested with him was that his investment product looked conservative and consistent given the economic climate. The state of the economy should also be taken into account before spreading blame solely to the investor.
There also can be a failure in the regulatory bodies themselves. They can be understaffed and under resourced so do not have the capacity to investigate any complaints or red flags raised by stakeholders. The regulatory bodies themselves can also be corrupt which leads to a further failure to identify and eliminate any fraudsters from the market. Regulatory body failure should also be considered before only blaming the investor.
From a psychological point of view people tend to trust their close friends and family. It is why both Pyramid and Ponzi schemes defraud clusters of people who knows each other for example all the people who are members of a country club may be victims of the same Ponzi scheme at the same …show more content…
One method to increase income is to treat loans as sales. Both loans and sales are credits so this leads to some maneuvering room. Enron used the company Whitewing as an entity to exaggerate sales with loans taken from the entity.
This can be avoided by auditing sales invoices and payments as well having external auditors randomly checking customers to see if they had not taken out loans.
2. Decrease Expenses
You can decrease expenses by reducing taxation. A Restaurant Owner Rennell D. West filed fraudulent tax returns. He owned a percentage of a restaurant Family Affair and deposited some of the proceeds in a personal account. The deposits did not reflect in the restaurants account.
This specific type of tax fraud was discovered through an audit. This type of fraud cannot be entirely prevented but Income Revenue Departments can request proof of income from business to disincentive business owners from committed this type of fraud.
3. Increase Assets
You can increase Assets by using a Mark-to-market strategy. Enron used it to increase assets, they increased their asset values with liberal interpretations of the timing and net worth of the assets.
Regulate the relationship between asset valuators and companies more stringently to ensure accountability from all