8Ed.sol1.09

8Ed.sol1.09 - CASE 1.9 ZZZZ BEST COMPANY, INC. Synopsis...

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ZZZZ BEST COMPANY, INC. Synopsis Barry Minkow founded ZZZZ Best Company, a carpet cleaning company, in 1982 at the age of 16. Within a matter of months, Minkow was engaging in several fraudulent schemes to raise working capital for his small company, including credit card forgeries and bogus insurance claims. Minkow soon became even bolder and began reporting fictitious revenues from “insurance restoration” contracts in ZZZZ Best’s financial statements to induce local banks to grant him loans. Eventually, the revenues from ZZZZ Best’s insurance restoration “business” became the dominant line item in the company’s financial statements. In fact, by 1987, the insurance restoration contracts accounted for 90% of ZZZZ Best’s annual revenues. In 1986, Minkow took ZZZZ Best public. On the strength of the impressive, but bogus, earnings and revenues figures reported for the company by Minkow, ZZZZ Best’s stock price increased dramatically during the first several months it was publicly traded. At one point in early 1987, the collective market value of the company’s outstanding stock, approximately one- half of which Minkow owned, exceeded $200,000,000. In July 1987, a few months after ZZZZ Best was exposed as a fraud, the tangible assets of the company were sold for $62,000 at a public auction. In reality, Minkow ran a complex Ponzi scheme for five years. The huge amount of funds ZZZZ Best raised from banks, private investors, and finally through public offerings of stock were squandered by Minkow and his associates on illicit expenditures of all types. In addition to the investors and creditors that Minkow swindled, among the parties most victimized by his elaborate scam were ZZZZ Best’s independent auditors. In a congressional investigation into the collapse of ZZZZ Best, the company’s auditors were criticized for their failure to expose Minkow’s fraudulent schemes. The investigative subcommittee that sponsored the ZZZZ Best hearings was particularly interested in why the company’s auditors failed to discover that the numerous multimillion-dollar insurance restoration contracts reported by Minkow were totally bogus. ZZZZ Best’s auditors were also questioned extensively regarding their decision to sign a confidentiality agreement that precluded them from obtaining evidence from independent third parties to corroborate the insurance restoration contracts. Among the other auditing-related issues raised during the course of the hearings was the subject of predecessor-successor auditor communications. Members of the congressional subcommittee were concerned that there had been a lack of candor in the communications between ZZZZ Best’s predecessor and successor auditors following both changes in auditors made by the company. ZZZZ Best Company--Key Facts
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8Ed.sol1.09 - CASE 1.9 ZZZZ BEST COMPANY, INC. Synopsis...

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