季少(Trtwarrior)

1, Who is the auditor

Whether the auditor is qualified to issue an auidt report is very essential to the quality of it. A qualified accounting firm should at least meet three requirements: enough qualified staff, plenty industry experience, and a good reputation. Maybe a large fund/company doesn't hire Big 4 accountant company as their auditor, they should at least hire a qualified accounting firm. If some guy is clean handed, there is no need to fear of the audit. In the Madoff's case, a fund as large as 50 billion USD alleged and as complex as Hedge fund only hire a 3-persons accounting firm, that is against alll logics. Why? Because 3 persons are never enough for auditing such a large and complex nature company. Actually, there is 1 partner who is 70 years old and leave the office, 1 secretary and 1 auditor. So, there is only 1 auditor in the end.

Please pay attention to the auditor of the fund who has your investment. Find out the reputation, the history of their business, and how many staff they really have. A good auditor could act as a stable wall which protects you against the possible loss.

2, Read the content of the Financial Statement

The auidt report could reveal a lot information of a company, through its Balance sheet, Profit & Loss, Cash flow and the notes to it. It can tells the investor its growing speed and other historical information. But is really pity is that Madoff kept his Financial statement well in the form of paper instead of normally electronic material. It is hard for a ordinary investor to obtain one.

As you have the right to read the FS as a shareholder, try to obtain one, it could do help. If it is refused, please refuse the investment Fund.   

3, Pay special attention to the irregular transactions

The irregular transactions are usually in low frequency and different in nature with the company's main business.

Although Madoff operates such a large fund of 50 billion USD alleged, each year end's equity in hand is much less, according to the report of the SEC. They said: In order to obtain clean financial report, they converted those equity into cash on hand.

Apparently, it is such a large irregular transaction that has direct quantitive impact on the Financial report on the year end. It is significant high risk that the management wants to control the financial report, which should be specially cautious to. It at last proved to be a tale of tub, they don't have such cash.

If you ever found or anyone told you some transaction that is irregular, strange and could not be explained, keep skepticism.