3.
There were many weaknesses in the “control environment” of Stanford Financial Group. The weaknesses include: the integrity and ethical values of management, the structure of the organization, the participation of the organizations board of directors and the audit committee, managements operating style, management’s methods for assessing performance, and the organizations policies and practices for managing human resources.
The board of directors consisted of 3 members; himself, his father and Oliver Goswick who had no banking experience. Independence from management and the board, the experience and stature of its members and involvements are all factors that affect the effectiveness of the board.
His management consisted of a small and tightly knit group of managers consisting of mostly friends. His college friend being his CFO and Laura Pendergest-Holt who had no banking experience when she was hired. If employees asked too many questions they were either fired or reassigned. Most of the important financial information was kept very secretive from outsiders and only the close group of management was kept informed of how the company was doing. His operating style consisted of taking big risks and poor financial reporting. Stanford Groups convinced investors into believing the C.D. purchases were safe by advertising investments in “liquid” securities that could be bought and sold easily and could be returned at higher than normal rates.
Stanford also made a small public accounting firm as the head auditor of his large operation. He should have had a more prominent auditing firm. Stanford made many large donations to political figures in hopes they would ease regulations towards offshore banking.
Stanford’s Financial Group failed to establish and maintain a strong control environment which led to the downfall of his