Financial Statement Fraud: Lessons from the Zzzz Best Case Analysis Essay Example

It was discovered that while filming and producing his biography, he simultaneously was using his anti-fraud company to short stocks of companies he was investigating. A few years later, Minkow was sentenced to an additional five years in prison for defrauding his church and tax evasion. Lincoln Savings grew from a $1 billion company in 1984 to a $5 billion
company in 1988. When Charles Keating purchased Lincoln Savings in 1984, its
business was comprised almost exclusively of home mortgages. By 1988,
home mortgages were almost nonexistent while direct investments in
stocks and bonds were commonplace.

  1. This
    article uses three recent cases, ZZZZ Best, Regina, and Lincoln Savings
    & Loan, to highlight some of the issues that accountants must be
    aware of when dealing with clients.
  2. In documents previously filed with the SEC, ZZZZ Best disclosed that 89% of its $33.3 million in revenue for the nine months ended Jan. 31 came from insurance restoration work, repairing carpets, flooring or furniture that have suffered water or fire damage.
  3. Eventually, the truth behind the fictitious companies was revealed and the Ponzi scheme was exposed.
  4. When the homemaker located the others, she passed her findings onto the Los Angeles Times.
  5. After an early release in 1995, he founded the Fraud Discovery Institute, which aided the FBI and law enforcement agencies in uncovering white collar crimes and their perpetrators.
  6. Consequently, Regina began experiencing a large number of
    product returns.

The L.A. Times featured her story, which caused ZZZZ Best’s stock price to decline sharply. Lenders began to call their loans and more investigations commenced, unraveling Minkow’s dark web of deceit and fraud. Eventually, the truth behind the fictitious companies was revealed and the Ponzi scheme was exposed. Barry was the wunderkind of Wall Street when he took ZZZZ Best public in December of 1986. At age 21, he was the youngest person in US history at the time to take a company public.

In May, for example, ZZZZ Best said it had won a $13.8-million restoration contract to work on two Dallas buildings. The contract was awarded by Interstate Appraisal Services of Culver City and Assured Property Management of Sacramento. https://1investing.in/ The Securities and Exchange Commission is known to be investigating the company’s public financial disclosures. After his early release in 1995, he became an ordained minister and served as a pastor of a church in California.

What Accounting Procedures Did ZZZZ Best Fail to Follow?

In a prospectus related to a public offering in late 1986,
the company stated that 86% of ZZZZ Best’s business was in the insurance
restoration area. Instances
abound of how carefully constructed frauds can deceive accountants,
banks, creditors, stockholders, government agencies and others. This
article uses three recent cases, ZZZZ Best, Regina, and Lincoln Savings
& Loan, to highlight some of the issues that accountants must be
aware of when dealing with clients. The red flags common to these three
companies are identified to suggest important early warning signals for
auditors. In January 1988, Minkow and 11 other company insiders were indicted by a grand jury on counts of racketeering, money laundering, securities fraud, embezzlement, mail fraud, bank fraud, and tax evasion.

ZZZZ Best failed because it was a Ponzi scheme so, in essence, the company followed almost no proper accounting procedures. However, it took the company going public before the fraud was discovered so there is an argument that exists that Minkow was quite skilled with his accounting. As the Ponzi scheme continued, ZZZZ Best experienced significant cash flow problems. As a solution, Minkow planned to acquire KeyServ, Sears’ authorized carpet cleaner, for $25 million. According to Minkow, the revenues from KeyServ would provide enough cash flow to end the Ponzi scheme. Before the deal was closed, the jilted homemaker sparked a campaign against ZZZZ Best that would expose more than the fraud committed against her.

ZZZZ Best was an industrial carpet cleaning company started in 1982 by a 16 year old American high school student named Barry Minkow. The company struggled from the very beginning and Barry tried to keep it afloat with bogus credit card charges, stealing from relatives and staging burglaries in order to collect the insurance money. Minkow convinced bankers and investors that he had won large contracts from insurance companies to restore buildings damaged by fire and water.

He was
easily able to intimidate his CFO into misstating the financial records. Auditors must be cautious when one individual has this much “unchecked”
power. The executives of Lincoln Savings spent
over $50 million in legal fees to fend off challenges from regulators
and other investigators. Thomas Padgett, president of Interstate Appraisal Services, declined in an interview last month zzzz best financial statements to give any details of the restoration contracts his firm had given ZZZZ Best, citing confidential agreements with his clients. In documents previously filed with the SEC, ZZZZ Best disclosed that 89% of its $33.3 million in revenue for the nine months ended Jan. 31 came from insurance restoration work, repairing carpets, flooring or furniture that have suffered water or fire damage.

ZZZZ Best Internal Probe Turns Up ‘Questions’ on Financial Statements

After an early release in 1995, he founded the Fraud Discovery Institute, which aided the FBI and law enforcement agencies in uncovering white collar crimes and their perpetrators. But, in 2011 he again fell foul of securities laws, was convicted of insider trading and sentenced to five years in prison. He found religion while in prison the first time and served as a pastor for many years, before pleading guilty in 2014 to defrauding his own church of more than $3 million in donations.

The Scheme and the Downfall

Barry Minkow’s company ZZZZ Best committed serious fraud and is one of the best-known Ponzi schemes in history. Even though Barry was released from prison early, he squandered the second chance and eventually ended up in much bigger trouble and ended up back in prison. Although there are multiple cinematic versions of his story, he is by no means a role model. ZZZZ Best was an excellent company on paper and at one point was valued over a quarter billion dollars, then bankrupted shortly afterward.

ZZZZ Best was a carpet cleaning and restoration company founded by Barry Minkow that served as a front for a famous Ponzi scheme. The company went public in December 1986 and was quickly valued at over $300 million. Within just seven months of the initial public offering (IPO), however, ZZZZ Best was bankrupt and its assets were auctioned for approximately $64,000. Therefore, all rental
payments, including escalated rentals, should be recognized on a
straight line basis.

Financial Scams – ZZZZ Best

The next day, ZZZZ Best lost 28% of its value and by July of 1987 Minkow stepped down as CEO. Shareholders got wiped out by the bankruptcy and by the time the scam had fully unraveled, investor losses amounted to more than $100 million. As a result of the financial pressure, he started to commit fraud by creating false accounts receivable and sales, false documents (using photocopies of real documents); he also forged credit card applications, staged theft, used bogus financial statements.

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From this success, he formed the fraudulent Fraud Discovery Institute. The business performed poorly and 15-year-old Minkow was often inundated with customer complaints and supplier collection requests. To create an illusion of a profitable business, Minkow began committing criminal acts, such as check kiting, theft, insurance scams, and fraud, to fund operations and pay suppliers.

Shares exploded, and the company’s valuation peaked around $280 million. These are just a few of the HR functions accounting firms must provide to stay competitive in the talent game. But Kurt Blackmon, president of Blackmon, Mooring Steamatic Catastrophe Inc., a major Fort Worth restoration firm, said in an interview that he had never heard of a contract that large in Dallas.

This garnered him another five year prison sentence and he was released in the summer of 2019. ZZZZ Best went from a start-up organization with no assets, to a
multi-million dollar company in less than five years. During this
period, its primary business changed from carpet-cleaning to insurance
restoration.

Regina went from a one product company with $60 million in sales in
1985 to a four product company with $181 million in sales in 1988. In
the effort to boost sales, however, proper testing of new products was
eliminated. Consequently, Regina began experiencing a large number of
product returns. An internal memo showed that customers returned more
than 40,000 Housekeeper vacuums in the quarter ended on September 30,
1988. The problem became so severe that Don Sheelen, the CEO, eventually
leased a building to store the defective products.

Moreover, he created two property management companies, and used these two companies to generate paper profit. The falsified paper profit accounted for almost 90% of ZZZZ Best’s revenue. Minkow was convicted of 57 counts of credit card fraud, racketeering, securities fraud, money laundering, embezzlement, mail fraud, tax evasion, as well as bank fraud and was sentenced to 25 years in jail.

Minkow was visited by his past when a homemaker who was overcharged just a few hundred dollars by Minkow tracked down a few others who Minkow had defrauded. When the homemaker located the others, she passed her findings onto the Los Angeles Times. The newspaper then ran a story exposing Minkow’s relatively minor fraud. This caused a domino effect and ZZZZ Best was quickly outed as a Ponzi scheme. The Asian financial crisis of 1997 provided some valuable lessons about the global financial systems. The Asian financial crisis of 1997 was a global phenomenon that acted as a fundamental learning curve for nation-states, graphic regions and ultimately the global economy.