ZZZZ Best, Inc.
The start of ZZZZ Best:
ZZZZ Best started as a carpet cleaning company. Barry Minkow founded ZZZZ Best in his parents’ garage in 1982 when he was only sixteen years old. Due to high competition in the industry, low enter barriers, and bad internal control, this young entrepreneur started to have cash flow problems, and a shortage of working capital.
Pressure Leads to Fraud:
Under financial pressure, Minkow started to commit fraud. He forged credit card applications, staged theft, used bogus financial statements, and used his networking skills to entice wealthy investors. The most serious fraud he made was inflating the value of the company’s insurance restoration contracts (Knapp, 2006).
Inflated Insurance Restoration Contract
Minkow created two property management companies, the Interstate Appraisal Service and Assured Property Management. He also hired a well-known insurance agent, Tom Padgett, to be the principal officer of Interstate Appraisal Service and used these two companies to generate paper profit. The falsified paper profit accounted for almost 90% of ZZZZ Best’s revenue.
Deception of Auditors:
1. False confirmations
Since most of revenue came from insurance restoration contracts, George Greenspan, the first auditor of ZZZZ Best, contacted Tom Padgett to confirm the existence of the insurance restoration contracts. Padgett, being in on the fraud, lied and gave Greenspan a positive answer.
2. Misleading auditors:
Barry Minkow dismissed Greenspan after his audit of 1986 financials and hired Larry Gray from Ernst & Whinney. Because the amount of insurance restoration contracts was material, Gray informed ZZZZ Best of his wish to observe the restoration sites to ...