ZZZZ Best, Inc.
ACCT 406.001
5/13/2014
Hillary Thomas
When Barry Minkow and ZZZZ Best went public in mid-1986, Minkow and his close friends came together and became multi-millionaires overnight. The total market value of ZZZZ Best surpassed $200 million, making Barry the youngest Chief Executive Officer in the nation. Now a new sought-after commodity, Minkow’s overnight success did not trigger any red flags to the public or to any audit and law firms at first. Ernst & Whinney, the auditing firm that handled the company’s books during the majority of the time ZZZZ Best was active, wrote an engagement letter to Barry Minkow in September 1986, outlining the four services that they planned on providing for ZZZZ Best as the new auditors; a review of the company’s financial statements for the three-month period ending July 31, 1986, assistance in the preparation of a registration statement to be filed with the SEC, a comfort letter to be submitted to ZZZZ Best’s underwriters, and a full-scope audit for the fiscal year ending April 30, 1987.
Of those four services, Ernst & Whinney did not provide the last, a full-scope audit for the fiscal year ending April 30, 1987. Instead, they did issue a review report on the company’s quarterly statements for the three months ending July 31, 1986. Upon completion of reviewing the financial statements, a report is issued stating that a review has been performed in accordance with the American Institute of Certified Public Accountants (AICPA) professional standards, and whether or not the CPA became aware of any material modifications that should be made in order for the statements to be in conformity with Generally Accepted Accounting Principles (GAAP).
Reviewed financial statements are o...
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...l of the red flags that had been raised during the time period they were assigned as the auditors for ZZZZ Best.
ZZZZ Best and Barry Minkow soon collapsed in May 1987 after an article in the Los Angeles Times was published that disparaged the boy wonder. From an early age, Barry was intrigued by credit card forgeries and stealing money, and getting away with it boosted his ego and self esteem and made him curious to see how far he could take it. That newspaper article resulted in a domino effect of events that resulted in the collapse of ZZZZ Best in less than three months of going viral. A small brokerage firm began short-selling ZZZZ Best’s stock, forcing the price into a tailspin. Most importantly, the article pushed Minkow into a frenzy and forced him to make several daring moves that cost him more than what all of his millions could buy him, his credibility.
Arens, Alvin A., Elder, Randall J., and Beasley, Mark S. (2012). Auditing and Assurance Services:
When it comes to the audit objectives, the public and the auditing profession maintain varying expectations. The public expects the prevention of fraud to be the auditor’s responsibility. However, the auditors believe that they are responsible for fraud detection, but not obliged to find all of it. In addition, the public views the fraud by the characteristics displayed by management and employees. For example, WoolEx Mills’ management wanted to exude a prevailing financial position and to uphold reputations. By committing financial statement fraud, it made the company look successful even though Sales and cash flows were decreasing. The public would view these particular characteristics as pressures to why the company committed fraud. Greed, recognition, and influences also impacted the public’s view of Wool Ex Mills’ fraud scheme. The CEO used authority to influence employees to take part in the fraud scheme. The public would see that the CEO utilized power to manipulate shareholders, which impacted their trust with WoolEx Mills (Cohen, Ding, Lesage, & Stolowy 2015) (Krishnan & Shah
The second part, “Why It Happened: Eighty-Five Years,” explains the origins of the firm and its founding and operating principles, and it sets the basics for why several deviations from these founding principles eventually led the firm astray.
As what it came to be as one of the notorious case of fraud in the mid-1980s; the electronic store well known as (Crazy Eddie), its owner Eddie Antar and CFO Sam Antar committed every possible act fraud there is. Just to mention two of which they perpetrated; tax evasion and securities fraud. Basically, the tax evasion was committed for many years, it was not until the company became public in 1984 that their wrong doing near its end. Once Crazy Eddie went public, a new set of rules took place, such as compliance with the Securities Exchange Commission and the scrutiny of its investors. Soon, they both realized that their long committed fraud was nearing its end, when an external audit found the real numbers on the company’s inventory, revenues,
The Fastows headed to Mrs. Fastow's native Houston in 1990, both taking jobs at a young company called Enron. Just five years old, Enron was starting to evolve from a natural-gas and pipeline company into a trading firm. Mr. Fastow was one of the first managers hired by Mr. [Jeffrey Skilling], who himself had only recently arrived, from management consultants McKinsey & Co. Brought into Mr. Skilling's inner circle, Mr. Fastow returned the loyalty, telling colleagues he had named a child after his mentor. When Mr. Skilling became Enron's president and chief operating officer in early 1997, he and Mr. [Kenneth Lay] promoted Mr. Fastow to lead a new finance department. A year later, Mr. Fastow became chief financial officer.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
ZZZZ Best was founded in 1982, by Barry Minkow who was 16 at the time. ZZZZ Best was a carpet cleaning business that was operated by going door-to-door. The business operated out of San Fernando Valley, Southern California in his parent’s garage. The business experienced drastic growth the first three years, bringing an income of no less than $200,000 however no more than $5 million. Prior to going public, ZZZZ Best experienced many struggles such as complaining customers, bank account closures, and bad checks. Therefore, in 1986, ZZZZ Best went public, the owner and his associates were millionaires immediately. Due to Barry’s immediate success he was sought after by many television networks. He appeared on Oprah and many other famous television shows. He sent a message to people that “the sky was the limit” and they could achieve anything. He was an attractive man and very charming. About two years after his appearance on Oprah, Barry was in prison serving a 25 year sentence, he was found guilty on 57 charges of security fraud. Once he was exposed, he was viewed as a fast talking swindler who took people’s money. Barry used his extensive social background to get what he wanted. He realized that his social connection could be used to his advantage. Many of his social connections came from the Los Angeles health club. One of his acquaintances, Tom Paige in particular was a claim’s adjuster, he came up with a scheme to use his relationship to his advantage. Barry created fraudulent insurance contracts to have proof of profit on paper to convince bankers to lend him money. Once he obtained loans he began to expand his business in Southern California. He used his falsified financial statements to attract wealthy indiv...
In an interview with James Wetherbe, Richard M. Schulze tells of how at eleven-years-old he became an entrepreneur in St. Paul, Minnesota as a paperboy. This newspaper boy would grow up to be founder of the world’s largest consumer electronics chain store, Best Buy Co. Inc. (Schulze, 2014). As an adult in 1966 Schulze partnered up with Gary Smoliak and opened the company called Sound of Music until 1986 (Bailey, 2015). Schulze bought out Smoliak around 1970 and by 1983 he had changed the name of the company to Best Buy Co., Inc. Four years later Best Buy Co., Inc. secures an entry on the New York Stock Exchange. During the early 1990’s Best Buy Co., Inc., had become the largest consumer electronics store in the United States.
At the age of 20, Barry Minkow executed a con so risky, that some accounting and business schools teach it as a case study. He founded ZZZZ Best Carpet & Furniture Cleaning Co., Inc. when he was just 16 years old, operating out of his parent’s garage (Parloff, 2012). Then he franchised it into a chain and finally took it public. On paper, he was worth $100 million dollars. He drove a Ferrari and even appeared on Oprah Winfrey, upping himself and his stock. “Think big, be big.” is what Barry told Oprah to which she responded, “Really?”, almost rolling her eyes. He responds with, “End of story.” before giving her a smirk. Barry claims he started his business with the best of intentions but lie, stole, and cheated when he could not pay
Sandberg, J., Solomon, D., & Blumenstein, R. (2002, June 27). Accounting Spot-Check Unearthed A Scandal in WorldCom's Books. Retrieved from The Wall Street Journal: http://online.wsj.com/article/SB102512901721030520.html
This shows how a lack of transparency in reporting of financial statements leads to the destruction of a company. This all happened under the watchful eye of an auditor, Arthur Andersen. After this scandal, the Sarbanes-Oxley Act was changed to keep into account the role of the auditors and how they can help in preventing such
The fundamental duty of an external financial auditor is to form and express an opinion on whether the reporting entity’s financial statements are prepared in accordance with the relevant financial reporting framework. In discharging this duty, the auditor must exercise “reasonable skill, care and caution” (Lopes, J. in Kingston Cotton Mill Co 1896) as reflected in current legal and professional requirements.
The business Tyco was first established in 1960; four years later the company went public and became primarily a manufacturer of products for commercial use. Since then Tyco has grown rapidly with a presence in over 100 countries and over 250,000 employees. During the dates of 1991 to 2001 when Dennis Kozlowski was the CEO of Tyco, the annual sales grew tremendously from $3 billion in annual sales to $36 billion. However, later in 2002 Tyco faced issues with stockholders being extremely cautions after the bankruptcy of Enron, Kozlowski attempted to reassure the public that their accounting was correct. As time passed we learned that Dennis Kozlowski was not being truthful with this statement.
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The Auditor-Firm Conflict of Interests: Its Implications for Independence: A Reply. By: Goldman, Arieh; Barlev, Benzion. Accounting Review, Oct75, Vol. 50 Issue 4, p857-859, 3p