Accounting Frauds: ZZZZ Best Company, Inc
ZZZZ Best company is one of the biggest examples of Accounting Frauds. The founder of ZZZZ best was Barry Minkow. He was a very smart young entrepreneur when he started the company. He was involved in credit card forgeries prior to starting his own carpet cleaning business “ZZZZ Best Company”. Minkow began his business with small carpet cleaning jobs and he became a multimillionaire in a very short period of time. Minkow met a person named Tom Padgett at Los Angeles Health club. This was the beginning of Minkow’s big fraud scheme.
Padgett was the insurance claims adjuster and Minkow became his friend. After becoming Padgett’s friend, Minkow thought of using his friendship with him to make profit in his business. He convinced Padgett to simply confirm over the telephone to banks and any other interested third parties that ZZZZ Best was the recipient of occasional insurance restoration contacts. Minkow made a deal with Padgett that he will pay him $100 every week for doing this. Padgett did what Minkow wanted him to do and this was the first success of Minkow in his big fraud scheme.
Minkow was able to get big loans from Banks by showing them the insurance restoration contacts. After successfully receiving loans from banks, Minkow decided to focus more on loans restoration contracts. ZZZZ Best’s 80 percent of the revenue was from insurance restoration contacts. Minkow reduced his carpet cleaning services and started taking more and more loan from banks and he was successful in that with the help of his friend Padgett. After this huge success ZZZZ Best became a big firm from a very small carpet cleaning company. This was the time when Minkow decided to go public with ZZZZ Best Company.
Minkow’s decision to take ZZZZ Best public meant that he could no longer completely control his firm’s financial disclosures. Registering with the SEC required auditors, investment bankers, and outside attorneys to pursue ZZZZ Best’s periodic financial statements. ZZZZ Best was first subjected to a full-scope independent audit for the 12 months ended April 30, 1986. George Greenspan, the sole practitioner who performed that audit, confirmed the existence of ZZZZ Best’s major insurance restoration contracts by contacting Tom Padgett.
Padgett served as the principal officer of Interstate Appraisal Services, which reportedly contracted the jobs out to ZZZZ Best. By this time, Padgett was an active and willing participant in Minkow’s fraudulent schemes. Minkow established Interstate Appraisal Services and Assured Property Management for the sole purpose of generating fake insurance restoration contacts for ZZZZ Best. The first Auditor of ZZZZ Best, Mr. Greenspan was deceived by Minkow. Mr. Greenspan only contacted Padgett for confirming the insurance restoration contracts.
He did not visit the sites of the contracts, neither did he looked for further details. Padgett was involved in the fraudulent scheme with Minkow and he lied to Mr. Greenspan that the contracts held by ZZZZ Best exist. But it was Mr. Greenspan’s duty as an independent auditor that he should have checked the sites of the contracts and all the paper work pertaining to them. It was his carelessness which made Minkow successful in deceiving the first Auditor of ZZZZ best. This is what encouraged Minkow to carry on with bigger fraudulent schemes.
The second firm that Audited ZZZZ Best was Ernst & Whinney. Shortly after Greenspan completed his audit of ZZZZ Best’s financial statements for fiscal year 1986. Minkow dismissed him and retained Ernst & Whinney to perform the following year’s audit. Ernst & Whinney intented to provide ZZZZ Best: a review of the company’s financial statements, assistance in the preparation of a registration statement to be filed with the SEC, a comfort letter ZZZZ Best’s underwriters, and a full scope audit for the year 1987.
They had completed everything that they had intended for, However, Ernst & Whinney never completed the 1987 audit. This was because, they started hearing about the fraudulent schemes taking part in ZZZZ Best’s operations. The major event that alarmed Ernst & Whinney was the article in Los Angeles times regarding Minkow. It was stated in the article that Minkow was involved in credit card forgeries at a very young age prior to starting his own company. This was the time when investors and others associated with ZZZZ Best started to step back.
This was a major reason that concerned Ernst & Whinney about ZZZZ Best. In addition to the news article, Ernst & Whinney also received a letter from an anonymous writer, who warned them about the fraud in ZZZZ Best. It was stated that the assets of ZZZZ Best are not properly reported and the insurance restoration contacts were all fraudulent. Ernst & Whinney questioned Minkow about the fraudulent Insurance restoration contracts but Minkow was able to prove them that the contracts exist.
He gave them the address of a building that was being restored and he bribed the security guard and others to tell them that the building is contracted under ZZZZ Best Company. This was sufficient to prove Ernst & Whinney that the contracts stated in ZZZZ Best financial statements were accurate and they did exist. In spite of that, Ernst & Whinney did not audit the ZZZZ Best in 1987 due to Minkow’s bad reputation and the news about the fraudulent contracts. Minkow was successful in getting away from another audit and continued operating his firm with all the fraudulent contracts and other credit card frauds.
According to my understanding of this case, I think that the auditors should be very careful in their job because it could create a major problem and loss in corporate world as well as Accounting profession. In this case it is proven that the negligence of two auditors had allowed a firm to operate by doing a big fraud to earn profit. Even after two audits, the auditors were not able to catch the fraud in the firm. It was caught when a normal women who was defrauded by ZZZZ Best, kept the track of all credit card forgeries done by ZZZZ Best