Bernard Madoff Ponzi Scheme Video

Since this is an general MBA content blog, I thought you might enjoy watching the PBS Frontline video about the Bernie Madoff Ponzi Scheme. I've introduced this video into several of the courses I teach as a springboard for discussions about accounting, information systems, and quantitative reasoning. This is an optional activity that takes about an hour. Students need high bandwidth Internet.

I ask students to try to identify what went wrong with "Wall Street" to allow Mr. Madoff to run such a fraudulent enterprise and evade detection for decades, including some of the following questions:

Did you notice that Madoff's investment firm had a fake information system that was used to produce simulated trades and client statements?

Who was to blame? Investors? Accountants? SEC Regulators? News Media? Mr. Madoff's Employees? Fund Managers? Who?

Do you see how helpless investors can be when even truthful information is reported by publicly-traded companies...?

Here is the link:

http://www.pbs.org/wgbh/pages/frontline/madoff/

Accepting Proposals with Positive Contribution Margins

A bird in the hand is worth two in the bush, as the common expressions goes, but is that true in all cases. It is common in small and medium-sized businesses to accept proposals from the sales force that offer positive contribution margin, regardless of other operational aspects. In effect, these orders cover variable costs and are at production / sales levels above break-even. That is, fixed costs are covered. However, it is possible to create problems by accepting all orders are above break-even, without thinking about the big picture. For example, the pricing strategy (such as a market penetration strategy) may set the quoted price far above the level of positive contribution. In this case, sales management and company management will want to be judicious with respect to the price they accept in the case of volume discounts. Why? It is possible that large quantity orders at higher prices (and therefore higher contribution margins) may be in the sales pipeline that will be far more profitable for the company. It is possible that excess capacity could be used fulfilling orders with lower profitability. Simply accepting orders priced above break-even does not maximize profitability without some careful sales management.

Personal Finance Cash Flow Analogy

Without business-related accounting experience, it sometimes can be difficult to understand the relationship between cash flow and net income, and the need for prudent managers to think about both. Your personal finances can provide an interesting analogy. Clearly, we can continue to get "cash flow" from credit cards, in the form of purchases and cash advances, but without earnings (i.e., net income) one won't be able to pay even the minimum payment on the credit card loans, which would be an outflow of cash. If you were to maintain your check book on Quicken (or use QuickBooks as overkill), this relationship between income earned and cash received would be obvious. Still, one could earn money by working for a business, but without the receipt of payment for that work, cash is not realized. Hence, net income is important but cash flow is a necessity as well.