Accounting fraud cases: Minkow, Tyson Foods, and subprime mortgages

ZZZZ Best

Recent Developments in the Barry Minnow Case: Ongoing Implications and Lessons of the ZZZ Best Company

This article outlines three different past cases of significant accounting issues that led to collapses of various levels, from single companies (and some of their investors) to (potentially, at least in part) the entire global economy. The first of these cases is that of Barry Minkow, beginning with his ZZZZ Best carpet cleaning company, which Minkow founded when he was only 16 years old and quickly took public at a valuation of over $200 million. As time wore on, however, it quickly became clear that the business was largely a fraud, an in fact Minkow had been running a Ponzi scheme for quite some time with the business largely a shell (though it did actually make some profit from cleaning carpets, as well).

Eventually arrested and sentenced to twenty-five years in prison for the fraud he committed, Minkow only served seven and became a pastor upon his release; as part of his claimed reformation he also started the Fraud Discovery Institute in San Diego, but ultimately was convicted of more illegal activity in his financial dealings. Minkow used his fraud investigations and relationships with law enforcement to manipulate stock prices and profit from the results, and was just recently sentenced to federal prison for five more years due to his actions involving the homebuilding company Lennar Corp. The article says that though the "once bad, always bad" conclusion that can be reached here is too simplistic, it is not altogether incorrect. The fact that Minkow successfully perpetrated major frauds twice is certainly cause for concern.

The article goes on to describe two other recent incidents involving fraudulent or misleading accounting practices. In the first case, executives at Tyson foods found that payments were being made to the wives of two veterinarians responsible for ensuring the safety of Tyson's meat exports, and instead of simply halting the payments the executives worked to shift the payments directly to the veterinarians as fairly explicit bribes. The final case described and discussed in the article is the use of stated-income mortgage products, which were tried without much success on a nationwide basis by Citibank in the 1980s, and which were largely responsible for the massive default rate that occurred as part of the recent downturn in the U.S. economy. All of these cases, from Minkow to the creation of mortgage products that weren't backed with solid data, reflect problems not only in honesty but also in the controls and auditing procedures of external agencies and investors.

Section B: Problem Statement

The primary problem in the ZZZZ Best Company case is simply Minkow's extreme dishonesty, which was clearly demonstrated in his later actions in an entirely different set of circumstances from the initial fraud he perpetrated. The primary problem in the Tyson case is a lack of ethical control, where payoffs that circumvented regulations were seen as valid throughout the company, and by the executives when they discovered the action. With the mortgages, the problem was a more explicit lack of control and auditing; this can also be seen as the paramount problem for the continuation of improper actions in the other cases.

Section D: Explanation of Auditing Relevance

The ZZZZ Best case and Minkow's later actions are directly related to the issue of auditing, even though auditing concerns (or more specifically, the concern raised by the lack of auditing) is not cited as the central cause in either incident. Even a scant amount of external auditing in the ZZZZ Best case, especially in the latter years of the company, would have quickly revealed that its financial situation and business activities were nowhere near as substantial as had been claimed in financial documents or in the press. Auditing is meant to ensure transparency and honest action due to the fact that auditing will, when properly carried out, expose fraud and deliberate cover-ups; the lack of auditing of ZZZZ Best and the trust Minkow had that such auditing would not occur allowed his fraud to continue. In Minkow's later exploits, it is only because Lennar Corp. essentially forced a closer examination of Minkow's financials and investment activities -- that is, an audit of sorts -- that his fraud was ever discovered and that he was brought to justice for a second time.

In the Tyson Foods case, internal auditing would have revealed the payouts being made much sooner, rather than leaving the executives unaware for some time. External auditing would also have identified the problem and actually led to its correction. In the case of the stated-income mortgage products, auditing by any of the financial institutions that handled the mortgage products would have revealed their insecurity. In all of these cases, auditing would have caught issues earlier, before they became such major problems.

Reference

Steinberg, R. (2011). We Won't Get Fooled Again ... And Again, and Again. Accessed 30 October 2011. http://insurancenewsnet.com/article.aspx?id=293087