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The story of ZZZZ Best is one of greed and abdaciousness. It is the story of a I5.year-old boy from Reseda, California, who was driven

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The story of ZZZZ Best is one of greed and abdaciousness. It is the story of a I5.year-old boy from Reseda, California, who was driven to be successful, regardless of the costs. His name is Barry Minkow. Although this case dates back over 30 years, it does serve as an example of what can happen when auditors do not look too hard to find fraud. Minkow had high bopes to make it biz-to be a millionaire very early in life. He started a carpet cleaning business in the garage of his home. Miniow realized early on that he was not going to become a milionaire cleaning other people's carpets, but that he could in the insurance restoration business. In ofker words. 7727 Best would contract to do carpet and drapery cleaning jobs affer a fire of flood, Because the damaze from the fire of flood probably would be covered by insurance, the customer would be cager to have the work done, and perhaps not be all that concerned with how much it would cos. The only problem with Minkow's insurance restoration idea was thar it was all a Ection. Aliczedly, over 80 percent of his revenue was from this work. In the process of creating the fraud, Minkow was able to dupe the additors, Irnst \& Whinneg (now EY). into thinkieg the insarance restoration business was real. The auditors never caught on untif it was too late. How Barry Became a Fraudster of a is yearold kid wto was called a nonder boy" on Wall Street until the bubble burs. He was trying to find a way to drum up customers for his fedzling carpet cleaning business. One day, while he was alone in his garage offce, Minkow called Channel 4 in Los Angeles. He diveuised his wice so he woulda't sound like a fcetager and told a producer that be had just had his carpets cleaned by the 16y ear-old onper of 2722 thest. He sold the producer on the idea that it would be good for society to hear the success story about a high school funior running his own busisess. The producer bought it lock, stock, and cafpet cleaner. Minkow gave the producer the phone number of 2772 Best and waited. It tonk less than five nsinutes for the call to come in. Minkow answered the phone and when the producer asked to speak with Mr. Barry Minkow, Minkow sald, "Who may I say is calling?" Within days, a film crew was in his garage shooting 27ZZ Best at work. The stopy aired that nizht, and if was followed by more calls from radio stations and other television shows wantingt to do interviews The calis flooded in with customers demanding that Barry Minkow neranth chose As his income increased in the spring of 1983. Minkow found it increasingly difficult to run the company without a checking account. He managed to find a benker that was so moved by his story that the banker agreed to allow an underage customer 10 open a checking account. Minkow used the money to buy cleaning supplies and other necessities. Even though his business was growing. Minkow ran into trouble paying back loans and interest when duc. Minkow developed a plan of action. He was tired of worrying about not having enough money. He went to his garige-where all his great ideas first began-and looked at his bank accosnt statement, which showed that he had more money than he thought he had based on his own records. Minkow soon realized it was because some checks he had written had not been casbed by customers, so they didn't yet show up on the bank statement, Voilat Minkow started to kite checks between two or more banks. He would write a check on one ZZZZ Best account on the last day of the reporting period and deposit it into another. The check wouldn't clear Bank if for at least one day so he could count the cash in both accounts (back then, checks weren't always processed in real time the way they are today). It wasn't long thereaffer that Minkow realized be coeld kite checks big time. Not only that, be could make the transfer of funds at the end of a month of a year and show a higher balance than really existed in Bank II and carry it onto the balance shect. Because Minkow did not count the check written on his accoust in Bank "I as an outsanding check, he was able to double-count. Time to Expand the Fraud Over time, Miskow moved on to beeger and bizet frauds, like having his trused cohorts confirm to banks and other interested parties that Z7ZZ Best was doieg insurance restoration jobs. Minkow used the phony jobs and phony revenue to convince bankers to make loans to Z7Z Best. He had cash remitance forms made up from nonevivent customers with whatever sales amount he wanted to appear og the document. He even had a coconspirator write on the bogus remitance form, "Job well done." Minkow could then show a fot more revenue than he was really makies Minkow's phocy firancial statements enabled him to borrow mofe and more money and expand the number of carpet cleaning funds and putting a down payment on a 5,000-square-foot home, So, the question was: How do you tolve a perpetrith the bortowed control of the company Minkow had made it to the big leagues. He was on Wall Street. He had investment bankers, CPAs, and attorneys all working for him-the now 19-yearold kid from Reseda, California, who bad turned a momand-pop operation into a publicly owned corporation. Barry Goes Public Pressured to get a big-time CPA firm to do his audit by the underwriting firm selling his stock, Minkow hired Ernst \& Whinney to perform the April 30, 1987, flscal yearend audit. Minkow continued to be one step ahead of the auditors-that is, until the Ernst \& Whinney auditors insisted on going to see an insurance restoration site. They wanted to confirm that all the business-all the revenue-that Minkow had said was coming in to 77ZZ Best was real. The engagement partner drove to an area in Sacramento, California, where Minkow did a lot of work-supposedly. He looked for a building that seemed to be a restoration job. Why he did that isn't clear, bet he identified a building that seemed to be the kind that would be a restoration job in progress. Earlier in the week, Minkow had sent one of his coborts to find a large building in Sacramento that appeared to be a restoration site. As luck would have it. Minkow's asseciate picked out the same site as had the partner later on. Minkow's cohorts found the leasing agent for the building. They convinced the agent to give them the keys so that they could show the bualding to some potential tenants over the weekend. Minkow's heipers went up to the site before the arrival of the partner and placed placards on the walls that indicated 772Z Best was the contractor for the building restoration. In fact, the building was not fully constructed at the time, but it looked as if some restoration work was going on at the site. Minkos was able to pull it off in part due to luck and in part because the Erns \& Whinney auditors did not want to lose the ZZZZ Best account, It bad become a large revenue prodicer for the firm, and Minkow seemed destined for greater and greater achievements. Minkow was smart and used the leveraze of the auditors not wanting to lose the ZZZZ Best account as a way to complain whenever they became. too cunous about the insurance restoration jobs. He would even threaten to take his business from Ernst \& Whinney and give if to other auditon. To get on their good side, he would wise and dine the auditors and even invite them to his house Miakow also took a precaution with the sife visit. He had the auditors sign a confidentiality agreement that they would not make aay follow up calls to any contractors, insurance companies, the building owner, or other individuals involved in the restoration work. This prevented the audisors from corroborating the insurance restoration contracts with independent third parties. The Fraud Starts to Unravel It was a Los Angeles bousenife who started the problens for 7ZZZ Best that would eventually lead to the company's demise. Because Minkow was a wellknown figure and flamboyant character, the Los Angeles Tinses did a story about the carpet cleaning business. The Los Angeles bousewife read the story about Minkow and recalled that 7777 . Best had owercharged her for services in the early years by increasing the amouns of the credit card charge for its carpet eleaning services. Miskow had gambled that most people don'r check their monthly statements, so be could get away with the petty fraud. However, the housewife did notice the onercharge and complained to Minkow, and eventually he returned the overpayment. She couldn't understand why Minkow would have had to resort to such low levels back then if he was as successful as the Timer article made him out to be. So she called the reporter to find out more, and that ultimately led to the invertigation of ZZZZ Best and future storics that weren' so ffattering Becauso Minkow continued to spend lavishly on himself and his possessions, be always seemed to need more and more moncy. It Bot so bad over time that he was close to defaulting on loans and had to make up stories to keep the creditors at bay, and be couldri't pay his suppliers. The complaints kept coming in, and eventually the house of cards that was ZZZZ Best came crashing down. During the time that the fraud was unraveling. Frnst \& Whinney decided to resign from the Z7ZZ Best audit. It had started to doubt the veracity of Minkow and his bosiness at ZZZZ Beat Of course, by then it mattered little because the firm had been a party to the coverup for some time. Legal Liability Issues The 7777 Best fraod was one or the largest of its time. 7277 Best reportedly settled a shareholder class action Lawsust for $35 million Ernst \& Whinney was saed by a bank that had made a multimillion-dollag han based on the financial statements for the three-monch period ending July 31, 1986. The bank clained that it had retied on the review report isrued by Ernst & Whinney in granting the loan to Z7Z Best. Hoaever, the firm had indicated in its review report that it was not issuing an opinion on the ZZZZ Best financial statements The jubpe nuled that the bank was not jusufied in relying on the review report because Emst \& Whinney had expressly disclaimed issuing any opinion on the statements. The firm lucked out in that the judge understood that a review engagement only provides limited assurance rather than the reasonable assurance of the audit Barry Minkos was charged with eneaping in a 5100 million fraud acheme. He was sentenced to a term of 25 ways 1. What are the effects of Minkow's actions on the stakeholders? Explain. 2. Do you believe that auditors should be held liable for faling to discover fraud in situations such as ZZZZ. Best? is there any evidence that says they shouldn't? Explain 3. What red flags existed in the 2272 Best case? What should have been Emst & Whinney's actions with respect to audit risk? Explain. 4. Referring to the selected numbers from the financial statements of ZZZZ Best (under Questions at the end of the case) for the fiscal years. 1985 and 1986. What calculations or analyses would you make with respect to these numbers that might help you assess whether the financial relationships are reasonable, and how would they help this assessment

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