Officials from the United States' Securities and Exchange Commission (SEC) followed up on e-mail messages from a New York hedge fund describing Madoff's business practices as 'highly unusual', the paper said.
Madoff, 70, was arrested on Dec 11 and charged with securities fraud after allegedly telling his sons his investment advisory business was a Ponzi scheme, in which early investors are paid with money from subsequent participants.
Madoff is free on bail and has not formally responded to the charges or entered a plea.
The Financial Industry Regulatory Authority (Finra), the industry-run watchdog for brokerage firms, reported in 2007 that parts of the firm appeared to have no customers, according to the WSJ.
Madoff himself was interviewed at least twice by the SEC, the paper said, but investigators did not unearth his alleged fraudulent schemes, which they now believe began in the 1970s.
The serial regulatory failures were set to be on display yesterday, with Congress holding a hearing to probe why the alleged fraud went undetected, according to the WSJ.
Among the key witnesses was SEC inspector-general David Kotz, who was asked last month by the agency's chairman, Mr Christopher Cox, to investigate the mess, the paper said.
The failure to stop Madoff is an embarrassment for Ms Mary Schapiro, the Finra chief nominated by President-elect Barack Obama as the next SEC chairman.
Finra was involved in several investigations of Madoff's firm, concluding in 2007 that it violated technical rules and failed to report certain transactions in a timely way.
The House Financial Services Committee is scheduled to hear from one of Madoff's alleged victims and securities law experts, as well as Mr Kotz.
Mr Harry Markopolos, a former money manager who says regulators failed to act on his tips about Madoff, cancelled his appearance.
'The SEC will have to defend its existence,' said Professor Donald Langevoort, a former attorney who teaches securities law at Georgetown University.
The meeting is 'a way of sending a message to the SEC of Congress' anger and dismay that this happened, especially given all the things that have happened in the last six to eight months', such as the collapse of investment bank Lehman Brothers, he said.
REUTERS, BLOOMBERG