The Conman Barry Minkow ZZZZ Best

Barry Minkow (ZZZZ Best)
Tell the story
Barry Minkow is a con-man, who at the sage of 16 years established an outwardly fruitful carpet cleaning and restoration company by the name ZZZZ Best. Four years in after founding the company, Minkow took the company public. Notably, the shared he owned at the company had a valuation of $100,000. In a span of five years, the company had a market capitalization of $200 million. However, when the company collapsed in 1987, financial investigators came to the realization that most of the corporation’s purported revenues were fictitious. Regrettably, the financial statements of the company together with their associated source documents were all counterfeit. This was ascertained after a newspaper investigated into the activities of th company. Eventually, discovery of fraud took place and Minkow was given a jail sentence of 25 years in a federal prison. In addition, the court made an order for Minkow to pay reimbursement of $26 million.
Analyze a major fraud and Identify the nature of the fraud
One of the major frauds in the business realm is financial fraud. Fraud is a deliberately deceptive action that is intended to provide the culprit with an illegal gain, or to deny a right to a victim. A fraudulent act can be undertaken by one person, numerous persons, or a business entity as a whole. Fraud encompasses false representation of fact, whether by deliberately withholding significant data and information or providing false statements to a different party for the specific objective of attaining something that might not have been rendered devoid of the deception. In a broad sense, financial fraud can be delineated as an intentional action of deception encompassing financial transactions for the main objective of personal gain. Numerous fraud cases encompass intricate financial transactions that are undertaken by business professionals with expert knowledge and criminal intent. The nature of the financial fraud is that it operates outside the field of vision of the authorities, destabilizing the normal checks and balances in order for there to be changes taking place while at the same time the picture remains the same (Rezaee and Riley, 2009).
Categorize the fraud
Frauds can be separated into four groups including financial frauds, asset misappropriation, misappropriation of services and lastly fraudulent announcements that are linked to assets, performance, and reputation. In this case, the fraud that took place at ZZZZ Best was financial frauds. This can be further classified into corruption, falsification of financial accounts, misappropriation of asset value, and money laundering (Clikeman, 2013). This particular company participated in extensive financial fraud ranging from falsifying its financial statements, overcharging amounts to consumers, making fraudulent announcements of assets, asset misappropriation and their value.
Determine the red flags, the breakdown in internal control and/or the accounting oversight that should have been brought the fraud to light
There are several different red flags in addition to the breakdown in both internal control and oversight that ought to have brought the fraud to light. To begin with, there was no internal auditor and physical scrutiny of accounts was not done. George Greenspan was engaged by Mark Morze to audit the financial statements of ZZZZ best. However, the auditor resided approximately 3,000 miles away from the company’s business operations situated in southern California. In this regard, Greenspan never made any unexpected visits to the offices of the company and depended on documents as well as conformation to test the restoration contracts that encompasses just about 50 percent of ZZZZ Best’s claimed revenue (Clikeman, 2013). Second, ZZZZ Best has poor and ineffective internal controls, which made is significantly easy to conduct fraudulent activities. Tom Padgett easily formed phony contracts granting multimillion dollar building restoration projects to ZZZZ Best. He dutifully made conformation of the terms of any contract that the auditor made inquiries about. In addition, with respect to expenses of the company, Best made majority of the payments to Marbil Market for different supplies and subcontracting work. It is imperative to note that Marbil was established and controlled by Mark Morze and therefore any funds that the company received was taken back into the bank accounts of ZZZZ Best. Furthermore, Morze partook in the forgery of invoices as well as other documents to support the amounts obtained from ZZZZ Best (Clikeman, 2013).
Determine the procedures that should have been in place to detect the fraud
There are procedures that should have been in place to facilitate the detection of the fraud. First, there was the need to utilize a system of checks and balances to make certain that no one individual has control over the entire parts of a financial transaction. Barry was the individual authorized to write and also sign the checks, which facilitated the fraud schemes. It was necessary to make certain that the similar individual does not have all the authority. It was also necessary to undertake an independent checking of work being undertaken within the company, for instance, a member of the board of directors. A second internal control procedure that should have been in place takes into account the reconciliation of agency bank accounts every month. This encompasses investigating bank statements and cancelled checks to ascertain accountability. There should have also been a reconciliation report to document that an assessment and reconciliation was undertaken and file the bank statements and reconciliations.
Third, there should have been protection of checks against fraudulent use and also protection of cash and check collections. One of the key aspects of this internal control takes into account necessitating checks to be signed solely when all necessitated information is included on them and the documents to support them are also attached. Another aspect of this internal control procedure includes ensuring that all cash and checks obtained are timely recorded and deposited in the form originally obtained in addition to reconciling cash receipts on an everyday basis with suitable documentation (Singleton and Singleton, 2010). Another procedure that should have been in place in ZZZZ Best is extensive physical audits. This takes into account counting cash and tracking physical assets included in the accounting system. This can disclose well concealed discrepancies in account balances. Despite the fact that the company’s auditors, Ernst and Whinney, conducted physical checks of the buildings declared to be restored, they were not extensive. Specifically, the auditing company ought to have done such checks unannounced because this would not have given the members of ZZZZ Best the chance to undertake different activities and take measures to conceal their fraudulent actions (Rezaee and Riley, 2009).
Identify any company related events that were known to the public which should have been construed as a red flag
There are company associated events that were renowned to the public that ought to have been deemed as a red flag. Notably, there were no reports that were published in the newspaper regarding the catastrophic fires that were allegedly linked to what gave rise to ZZZZ Best’s major restoration contracts. The company had claimed that there was a major fire that had destroyed these buildings and therefore they had bid and gotten contracts for restoring the buildings. Secondly, immediately after opening his very first office, Barry kicked his own door and thereafter filed for an insurance claim asserting that equipment worth several thousand dollars had been stolen. Barry did a similar scheme six months later at a different office. However, this ought to have been a major red flag because there ought to have been reports showing and also cases of breaking in and reports to the security regarding the theft. Another red flag ought to have been the credit card scheme undertaken by the company. Notably, when ZZZZ Best started accepting payments from consumers through credit cards, Barry began making overcharges to consumers. He changed the amounts on the credit card receipts or made submissions of duplicate receipts for the similar service. Owing to numerous complaints the company was forced to refund such overcharges (Clikeman, 2013).
What was the response from the accounting profession, SEC, other governmental policing bodies
Subsequent to several months of investigation, Barry Minkow, Tom Padgett, Mark Morze, Mark Roddy, and other seven individuals were charged with a range of criminal offenses associated with being involved with ZZZZ Best. Notably, Roddy, Morze, and Padgett pleaded guilty on account of these charges and made an agreement of cooperating with the authorities (Clikeman, 2013). Furthermore, owing to the undertaking of auditing activities that were deficient, George Greenspan was permanently proscribed from practicing as an accountant before the Securities Exchange Commission. A major bank in California also filed a lawsuit against Ernst and Whinney in an endeavor to recover numerous millions of dollars that the financial institution had given out as loans to ZZZZ Best. However, the courts failed to hold the auditing firm liable for the bank’s losses owing to the reason that they did not give any opinion on ZZZZ Best’s financial statements. However, some shareholders of ZZZZ Best sued Ernst and Whinney, and the case ended up being settled out of court for $35 million (Clikeman, 2013).





References
Clikeman, P. M. (2013). Called to Account: Financial frauds that shaped the accounting profession. New York: Routledge.
Rezaee, Z., Riley, R. (2009). Financial statement fraud: prevention and detection. Hoboken: John Wiley & Sons.
Singleton, T. W., & Singleton, A. J. (2010). Fraud auditing and forensic accounting (Vol. 11). Hoboken: John Wiley & Sons.