What should we make of the Bernard Madoff scandal?


The very idea that for decades one of the most visible pillars of the American investment community had been, in effect, running a gigantic scam is hard to believe. Even harder to believe is the fact that so many investors were duped. The total amount lost was first reported at $50Bn, but this number may rise as more and more institutional investors own up to having lost money to Madoff’s scam. Hardest of all to believe though is that US regulators allowed Madoff to get away with it for so long.

A failure of due diligence and regulation

The collapse of Madoff’s investment funds has revealed:
• That individual investors failed to carry out due diligence checks, either because they put their trust in their brokers and advisers, or else because they just did not care so long as they continued to make money;
• That regulators failed to investigate Madoff even when serious concerns were raised that fraud was taking place.

Losses from project failure – much bigger than Madoff

You may be asking yourself what this can possibly have to do with the subject of managing project risks? Two things:

• 1. The amount of money lost — $50Bn — is only about one third of the money lost to project failure in the European Union every single year.
• 2. No-one seemed to conduct a proper risk assessment before committing huge sums of money (sounding familiar?).

Assessing risks: your personal responsibility

So what can you learn from this that will help you manage your projects better? Here are three lessons you can take away from this awful tale:

• 1. Become a disbeliever. When something looks too good to be true it is because it is not true. This piece of advice applies as much to investments that promise 10% or more every year, no matter what, as it does to project reports that forecast no problems.
• 2. You are personally responsible for assessing risks. This is something that you cannot overlook, skimp on or leave to others to do for you. Remember, the buck stops with you.
• 3. Do not take risks that you do not understand. This may seem drastic, but it makes sense. Better to stay away from projects if you are not equipped to manage them.

Conclusion

However bad the Madoff collapse looks right now, it represents a small amount of the money lost each year to failing projects. The next time you are asked to take on a project, remember that it is a high risk venture. Take personal responsibility for assessing risks. If you do that you will increase your chances of success and get a positive return on your investment.