I've made this the comment of the week, because it's exactly right:
The SEC is very good at rooting out sophisticated fraud, especially in accounting gimicks. But they, like most human beings, are simply not that good at identifying accounting statements that are simply made up out of whole cloth. Hindsight is 20-20 though and I'm sure plenty of people will be calling for heads to roll.
The brazenness of the fraud was, in some part, the reason it was easy to keep going. The SEC is looking for people pushing the envelope. It is not looking for people who have set fire to the envelope and substituted a piece of old newspaper recently used to wrap fish.
It's actually easier for someone committing outright fraud to slide under the SEC wire, because when you're making up financial statements out of whole cloth, it's not hard to make them conform to SEC regulations. Similarly, Stephen Glass and Jayson Blair and Jack Kelley were able to get away with their frauds precisely because they fabricated things out of whole cloth. If you misquote an actual person, or misreport something that really happened, there's a strong risk that you'll be caught. But manufactured sources never complain that you spelled their name wrong or twisted their words.
In the long run, of course, such fraud guarantees that you'll be caught. But as Madoff shows, the long run can be long enough for someone entering old age to hope to beat the law of averages, Keynes-style.
On a somewhat related tangent, here's the question that really bothers me about Blagojevich: what if the reason that he thought he could get away with it is that a lot of other politicians he knows about have?