...CASE 1.9 ZZZZ Best Company, \nc. On May 19,1987, a short article in The Wall Street Journal reported that ZZZZ Best Company, Inc., of Reseda, California, had signed a contract for a $13.8 million insurance restoration project. This project was just the most recent of a series of large restoration jobs obtained by ZZZZ Best (pronounced "zee best"). Located in the San Fernando Valley of southern California, ZZZZ Best had begun operations in the fall of 1982 as a small, door-ta-door carpet cleaning operation. Under the direction of Barry Minkow, the extroverted 16-year-old who founded the company and initially operated it out of his parents' garage, ZZZZ Best experienced explosive growth in both revenues and profits during the first several years of its existence. In the three-year period from 1984 to 1987, the company's net income surged from less than $200,000 to more than $5 million on revenues of $50 million. When 72ZZ Best went public in 1986,Minkow and several of his close associates became multimillionaires overnight. By the late spring of 1987,the market value of Minkow's stock in the company exceeded $100 million, while the total market value of 72ZZ Best surpassed $200 million. The youngest chief executive officer in the nation enjoyed the "good life;which included an elegant home in an exclusive suburb of Los Angeles and a fire-engine red Ferrari. Minkow's charm and entrepreneurial genius made him a sought-after commodity on the television talk show circuit and caused...
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...ZZZZ Best Company, Inc. Shiqi Hu, Lin Ding, Trang Mai, Yi Wang ACCT3309 Audit, O’Hara 11/03/2014 Background Barry Minkow, who is a young entrepreneur with history of credit card fraud as a teenager, was convicted on 57 counts of securities fraud. He started ZZZZ Best Company in carpet cleaning business in 1982 when he was only 16 years old. ZZZZ Best Company was turned into insurance restoration business that Minkow recognized the benefits with his own “innovative” way to finance his business. Minkow used fake restoration contracts to generate the paper profits and fake information to convince bankers to loan him money with help from his friend, Tom Padgett. The company focused on insurance restoration business and went public in 1986. First full-scope audit was completed by George Greenspan in April 1986. Ernst & Whinney was hired in 1987 after George was dismissed by Minkow. Larry Gary, auditor from Ernst & Whinney, required to visit a restoration site in a multimillion-dollar contract but was discouraged by Minkow. Minkow also required auditors to sign a confidentiality agreement that not to make any follow-up phone calls to any contractors and owners of the buildings before the visit to these phony sites. In May 1987, the Los Angeles Times published article on ZZZZ Best Company fraud accusations. Audit firms resigned after confirmations of the fraud and Ernst & Whinney received an anonymous letter that contains several allegations of fraudulent information...
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...Case 4-6 ZZZZ Best* The story of ZZZZ Best is one of greed and audaciousness. It is the story of a 15-year old boy from Reseda, California who was driven to be successful regardless of the costs. His name is Barry Minkow. Minkow had high hopes to make it big – to be a millionaire very early in life. He started a carpet cleaning business in the garage of his home. Minkow realized early on that he was not going to become a millionaire cleaning other people’s carpets. He had bigger plans than that. Minkow was going to make it big in the insurance restoration business. In other words, ZZZZ Best would contract to do carpet and drapery cleaning jobs after a fire or flood. Since the damage from the fire or flood probably would be covered by insurance, the customer would be eager to have the work done. The only problem with Minkow’s insurance restoration idea was that it was all a fiction. There were no insurance restoration jobs, at least for ZZZZ Best. In the process of creating the fraud, Minkow was able to dupe the auditors, Ernst & Whinney into thinking the insurance restoration business was real. In fact, over 80 percent of his revenue was allegedly from this work. The auditors never caught on until it was too late. How Barry Became a Fraudster Minkow wrote a book, Clean Sweep: A Story of Compromise, Corruption, Collapse, and Comeback** that provides some insights into the mind of a 15-year old kid __________________ * The facts are derived from a video...
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...requires that an auditor discharges professional responsibilities with competence and diligence. It imposes the obligation to perform professional services to the best of the auditor’s ability with concern for the best interest of the public. The sole proprietor-auditor and Ernst & Whinney did not gather enough evidence on the restoration contracts, nor viewed the evidence gathered with skepticism. Between 1985 and 1986 there is a 390% increase in Revenue and 350% increase in Cost of goods sold. The auditors should question the increase in accounts receivable, which was 33% of sales and represents four months on an annualized basis. The auditors should question where the cash is from the collection of sales (Sales of $4,845 less A/R of $693 less Cost of goods sold of$2,050). The company should have approximately $2 million to pay down liabilities or invest in assets. With the cash flow with borrowings of current liabilities and notes payable, the company had approximately $6.5 million before paying cost of goods sold or approximately $4.5 to pay down liabilities or invest in the company, yet cash only increased $50,000 for the year. Where was the cash used? 1. ZZZZ Best Company, which was initially a small rug-cleaning business, was founded by Barry Minkow when he was sixteen years old. 2. Minkow transformed ZZZZ Best into a leading company in...
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...founded ZZZZ Best Carpet Cleaning. Over the next several years, he franchised the chain and took it public. "In the three-year period from 1984 to 1987, the com¬pany’s net income surged from less than $200,000 to more than $5 million on reve¬nues of $50 million. When ZZZZ Best went public in 1986, Minkow and several of his close associ¬ates became multimillionaires overnight. By the late spring of 1987, Minkow’s stock in the company had a market value exceeding $100 million, and the total market value of ZZZZ Best surpassed $200 million." (Knapp) Less than two years later, Minkow had been exposed as a fast talking con artist who bilked his closest friends and Wall Street out of millions of dollars. Barry Minkow began serving a twenty-five-year prison sentence after being tried and convicted on fifty-seven counts of securities fraud. ZZZZ Best differed in part from a typical Ponzi scheme in that Minkow’s carpet-cleaning business was very real. "Indeed, the carpet-cleaning division won high marks for its quality." (Miller) However, its insurance restoration division, which eventually accounted for 86 percent of company revenues, was nonexistent. Minkow raised money by factoring his account receivables for work under contract, as well as floating funds through several banks in an elaborate check kiting scheme. The story of Barry Minkow is hardly an isolated case. According to the Association of Certified Fraud Examiners, "the estimated annual cost of occupational fraud to American...
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...MEMO To: Andrey Simonov From: Caitlin Doonan Subject: ZZZZ Best ------------------------------------------------- Date: October 10, 2013 ZZZZ Best Company, Inc., a carpet cleaning and restoration company became the illegitimate business front for one of the largest investment frauds in American history. Barry Minkow started working in the cutthroat carpet cleaning industry at a young age. A risky Minkow began perpetrating frauds on a small scale and eventually took his Ponzi scheme public. Red flags went unnoticed from banks, investors, and auditors. Crucial auditor mistakes postponed the uncovering of Minkow’s scam. ZZZZ Best, Inc. significantly impacted both the accounting and auditing industry both in practice and standards. Barry Minkow founded ZZZZ Best Company at the age of sixteen. Minkow’s exposure to the carpet cleaning industry came from his mother. She answered phones and conducted clerical work for a carpet cleaning company in the San Fernando Valley of California (Knapp). The carpet cleaning industry required very little start-up capital, even less experience, and no licensing requirements. These attributes enticed Minkow, a young entrepreneur, to start his own company.. However, the competition in the carpet cleaning industry made it difficult for Minkow to make profitable sales. Vendors wanted money from Minkow and sales were not enough to cover his costs. Banks refused to loan him money because his company barely made a profit (Knapp). These financial...
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...Fraud of ZZZ Best Company The ZZZ Best was the carpet cleaning company that was started by 15 year old Barry Minkow in 1982. He was inspired to enter into this industry by his mother when he was 12 years old. His mother was working as a telephone solicitor for a small carpet cleaning firm. Though most of the companies in carpet cleaning industry were legitimate, the nature of this business attracts many seedy characters of the malpractice. There are no barriers for any entry even no license was required. It was too easy that a 16 year old boy can start this business with his new driver’s license. The boy started his business as “rug sucker”. Minkow started his business named ZZZZ Best Carpet Cleaning Company in Reseda, San Fernando Valley, California. In the beginning stage Minkow ran his home based business out of his parent’s garage. Minkow soon realized that a small carpet cleaning business grew rapidly in next five years, but Minkow realized that it was difficult to earn from this business. To make earning better he had to face the cutthroat competition. The young boy had to face customer complaints, bad checks, and nagging vendors also demanding payment. And within very short time phrase he faced the fact of shortage of working capital. And moreover because of Minkow’s young age and the fact that ZZZZ Best was only marginally profitable business. All the local banks refused to give him loan. So, this teenager was looking for some easy ways of earning. Like check kiting...
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...Transcript of ZZZZ Best Company, Inc ZZZZ Best Company, Inc Case 1.9 Audit Review VS Full Audit Review • The accountant is not aware of any misstatements or material modifications that need to be made • Limited assurance • Auditor has no opinion on the financial statements, just looks them over Barry Minkow- 16 years old 1982 Carpet cleaning business turned insurance restoration Tom Padgett and Interstate Appraisal Services Ernst & Whinney- elaborate scheme to convince them History 1. Client imposed audit limitations 2. Limitations of audit evidence 3. Importance of auditor communication when one resigns & 8K filing Key Issues Audit- • Auditor obtains a high level of assurance • Auditor can express an opinion about the accuracy and level of assurance • Auditor tests internal controls and tests for misstatements and obtains and understanding of the entities internal control and fraud risk Matt Sepiol Samantha Claysen Limitations of Audit Evidence AU 326- Audit Evidence Auditors Used Confirmation, Documentation, and Analytical Procedures AU 326.08- Information from outside sources is better than from internal sources Confirmations were made by Tom Padgett who was involved in the scheme. Interstate Appraisal Services and Assured Property Management provided the Documentation Was Involved in Fraud Collusion amongst outside Parties Gives Evidence Limitations The client receiving payment doesn't prove the existence of those contracts. No third...
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...T.1.SAS No. 106 “Audit Evidence’, identifies the principal “managementassertions” that underlie a set of financial statements. The occurrenceassertion was particularly critical for ZZZZ Best’s insurance restorationcontracts. ZZZZ Best’s auditors obtained third-party confirmations tosupport the contracts, reviewed available documentation, performedanalytical procedures to evaluate the reasonableness of the revenuesrecorded on the contracts, and visited selected restoration sites.Comment on the limitations of the evidence that these proceduresprovide with regard to the management assertion of occurrence. Upon the performance of those procedures, the auditors of ZZZZBest Inc. had obtained evidence in order to draw reasonableconclusions on which to base the audit opinion. However, theseevidences are subject to limitations due to factors not controlled by theauditors. First limitation of the evidence is its insufficiency to supportthe occurrence, reliability and relevance of events and transactions.Mere paperwork is not enough to prove an event to have existed. Italso needs inquiries from people accountable in recording orrecognizing such events. Moreover, there’s a risk in being dependenton evidences provided by the management itself. Auditors should askcooperation from the third parties in order to verify all records. Secondlimitation is the rules implemented by the client which prohibit auditorsto further inspect or review the financial standing of the company.Some clients...
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...CASE 1.9 ZZZZ Best Company, \nc. On May 19,1987, a short article in The Wall Street Journal reported that ZZZZ Best Company, Inc., of Reseda, California, had signed a contract for a $13.8 million insurance restoration project. This project was just the most recent of a series of large restoration jobs obtained by ZZZZ Best (pronounced "zee best"). Located in the San Fernando Valley of southern California, ZZZZ Best had begun operations in the fall of 1982 as a small, door-ta-door carpet cleaning operation. Under the direction of Barry Minkow, the extroverted 16-year-old who founded the company and initially operated it out of his parents' garage, ZZZZ Best experienced explosive growth in both revenues and profits during the first several years of its existence. In the three-year period from 1984 to 1987, the company's net income surged from less than $200,000 to more than $5 million on revenues of $50 million. When 72ZZ Best went public in 1986,Minkow and several of his close associates became multimillionaires overnight. By the late spring of 1987,the market value of Minkow's stock in the company exceeded $100 million, while the total market value of 72ZZ Best surpassed $200 million. The youngest chief executive officer in the nation enjoyed the "good life;which included an elegant home in an exclusive suburb of Los Angeles and a fire-engine red Ferrari. Minkow's charm and entrepreneurial genius made him a sought-after commodity on the television talk show circuit and caused...
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...A California appellate court recognized Ernst & Whinney not liable to Union Bank of California which allegedly relied on Ernst’s review report in extending $ 7 million to ZZZZ Best Co. I agree with court’s decision because Ernst & Whinney never issued an audit opinion on financial statements it was just a review report which was disclosed. However, I do not justify Ernst & Whinney because the auditors besides from failure to notice ‘red flags’ had done few mistakes which lead to the law suit. The first mistake that the auditors made involved Mr. George Greenspan during the 1986 audit. This was the first audit since ZZZZ Best became a public company and the mistake involved the inspection of the insurance restoration sites. Mr. Greenspan had talked with Tom Padgett, and Mr. Padgett confirmed the insurance contracts were real and showed proper documents to back them up, Mr. Greenspan never actually inspected any of the actual insurance restoration sites. Doing so could have stopped the scam from hurting the public stockholders, especially because they take in such a huge percentage of income for ZZZZ Best. The second mistake involved Ernst & Whinney, was that Greenspan reported during the interview to the congressional subcommittee, that Ernst & Whinney never got in touch with him to talk about ZZZZ. If this conversation occurred, Greenspan might have been able to discuss his neglection to inspect the insurance restoration sites, which therefore could have given Ernst & Whinney...
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...Zzzz Best Company, Inc. Case 1.9 Zzzz Best Company, Inc. Case 1.9 Case 1.9 ZZZZ Best Company, Inc. Delta. Describe the elements of the Fraud Triangle that apply to this case. Assume you are the perpetrator. Is there a better way to perpetrate this fraud? If there is, describe your method. Specify practical recommendations for the client to prevent this fraud from occurring in the future. The first element of the Fraud Triangle in the case of ZZZZ Best, case 1.9 is Incentives/Pressure. Incentives/Pressure- As a result of the pressure placed on a person who is only a teenager in a tough business, one who faced a lack of working capital, the lack of assets and little profit make it difficult for a person of this stature to achieve financing to produce cash flow for sustaining of operations. One quickly realizes that through fraud a person could obtain funding to sustain operations. Through credit card fraudulent charges and check kiting and to stage theft to fleece one’s insurance company, producing more cash flow, one can raise Is this essay helpful? Join OPPapers to read more and access more than 600,000 just like it! get better grades quick and easy money. Through this experience with these types of fraud, it is realized quickly that one could bypass internal controls and create assets to bolster the company’s financial statements. From this point, with beating the system proving to be so easy, the next step is to forge friendships and acquaintances...
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...statements of ZZZZ Best; however, Ernst & Whinney did issue a review report on the companys quarterly statements for the three months ending July 31, 1986. How does a review differ from an audit, particularly in terms of the level of assurance implied by the auditors report ? Ernst & Whinney resigned as ZZZZ Bests auditor on June 2, 1987, following a series of disturbing events that caused the firm to question the integrity of M inkow and his associates. First, Ernst & Whinney was alarmed by a Los Angeles Times article in mid-May 1987 that revealed Minkow had been i nvolved in a string of credit card forgeries as a teenager. Second, on May 28, 1987, ZZZZ Best issued a press release, without consulting or notifying Ernst & Whinney, that reported record profits and revenues. The purpose of this press release was to restore in vestors confidence in the companyconfidence t hat had been shaken by the damaging Los Angeles Times story. Third, and most important, on May 29, Ernst & Whinney auditors discovered evidence supporting allegations made several weeks earlier by a third party informant t hat ZZZZ Bests insurance restoration business was fictitious. The informant had contacted Ernst & Whinney in April 1987 and asked for $25,000 in exchange for information proving that one of the firms clients was engaging i n a massive fraud. Ernst & Whinney refused to pay the sum, and the i ndividual recanted shortly thereafter, but not until the firm determined that t he allegation involved ZZZZ Best...
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...Qi Geng ACC 522 Professor Tatum 04/19/2014 Lessons Learned From Litigation Introduction It’s not just clients who make mistakes, auditors also make fatal errors that directly or indirectly “contributes’ to the “death” of their client companies. Internal audit failures, most of the time, are due to reasons that easily could have been prevented during audit planning. These reasons could be not setting aside enough time to adequately plan the audit, not involving the client or failing to put together appropriate team members, etc. How can auditors to more effectively detect financial statement fraud? One of the best ways is to “profit” from the mistakes of others. The following is a list of lessons to be learned from the cases that we examined in class and AICPA codes that are applied to each case. Independence (ET section 101) Rule 101–Independence. A member in public practice shall be independent in the performance of professional services as required by standards promulgated by bodies designated by Council. The impairment of independence can happen due to many reasons such as the close financial relationship between a covered member and a client, a covered member’s close relative’s position in the client’s company, etc. In the case of Leslie Fay, BDO Seidman’s independence was impaired, the auditing firm of Leslie Fay since mid-1970s, because the on-going litigation brought up by Leslie Fay’s stockholders. This is supported by the paragraph 8 of ET section 101, which...
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...ZZZ Best Company Inc. ZZZ Best Company, Inc. is good example for being explored by accounting students regarding audit field. In this case, ZZZ Best Company, Inc., which is established by Barry Minkow, became a tool for its owner i. E. Barry Minkow to get money by lying to thrid parties via fictitious insurance restoration project. Difficulties in developing carpet cleaning industry made Barry Minkow think to get money in wrong way. Collaborate with Tom Padgett and also extensive social network, made this big scheme to deceive big investors became easy. After success in cheating investors, Barry Minkow think bigger to make more money. He think to make ZZZ Best Company go public. For company which want to go public, it must fulfill many requirements of SEC. One of requirements is audited by accounting public officer. To fulfill that requirement, ZZZ Best Company Inc. hired George Greenspan to perform audit for 12 months. According to his testimony regarding ZZZ Best scandal to congressional subcommittee that investigated fraud in ZZZ Best Company, Inc., Greenspan insisted that he has proprtly audited Minkow’s company although finally Greenspan admitted that he had not inspected any of the insurance restoration sites. Next audit company which audited Minkow’s company was Ernst and Whinney. From Greenspan confession, he already communicate with Ernst and Whinney as predecessor auditor who audited ZZZ Best but this statement was rejected by Ernst and...
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