Analysis of Barry Minkow
Barry Minkow was born on the 17th day of March 1967 in Reseda California state (Akst). During his childhood, he stayed with his Jewish parents in a middle-class suburb in the San Fernando Valley. His parents operated a garage while the mother was working as a telephone operator for a carpet cleaning firm. It is claimed that at the age of twelve Barry Minkow was introduced to carpet cleaning work by his mother (Akst). According to available governmental regulations on the opening of businesses, the carpet cleaning industry does neither require licensing nor apprenticeships, but only a small capital to start (Akst).
These cheap opening restrictions are blamed for the entry of Barry Minkow into the carpet cleaning industry by founding the ZZZZ BEST Company in 1982, at the age of sixteen (Akst). However, based on the fact that this type of business is very common in the US, Barry Minkow was faced with stiff competition, a factor that sufficiently threatened his ability to earn a livelihood. According to him, customer complainants and nagging vendors’ demands for payments from his company proved a major challenge to the development of the company (Akst).
In addition, owing to his poor background, Barry Minkow could not successfully raise enough capital to sustain his newly established business. In addition, he could not get financial assistance from the local banks. As a result of these reasons, Barry Minkow developed a unique way of financing his business. Barry Minkow employed dubious means to expand his business capital. They raged from cheating insurance companies to gain unwarranted compensation, kiting of checks as well as constantly forging credit cards to acquire money (Lieberman). It is believed that Barry Minkow’s age and personal charm are the direct results of his escaping from law enforcement for his early age illegal but creative fund sourcing practices.
This was boosted by his enthusiasm to create a sustainable network of friends and acquaintances. Among these friends is Tom Padgett, an insurance claims adjuster, who helped Minkow secure loans from a local bank in the claim that ZZZZ BEST had obtained insurance restoration contracts (Akst). This success is thought of as the beginning of the extensive fraud activities by Minkow’s ZZZZ best company.
Description of the ZZZZ Best Carpeting Fraud case
The Red Flags that existed
ZZZZ BEST had a number of weaknesses in its internal control. According to the congress subcommittee investigating the fraud scam, the retention of ERNST & WHINNEY as auditors of the ZZZZ BEST Company was the biggest barrier to the early identification of the fraud (Lieberman). From available information, ERNST & WHINNEY did not contact the outgoing auditor of the company Greenspan.
From the agreement between ZZZZ BEST and ERNST & WHINNEY, the auditors were to engage in auditing, preparing a registration statement under the securities act, and write a letter for the underwriters (Wells 16). The auditors fulfilled these entire objectives even without finding out whether the claimed insurance restoration contracts were in existence or not.
Another internal weakness was brought by the high-profile Los Angeles law firm which represented ZZZZ Best as a legal counsel (Akst). According to investigation reports, the law firm defended ZZZZ BEST as legally operating despite the doubtful activities which were eminent in its operations. This is a negation of the provision laid down for legal counsel.
Management’s and/or auditor’s contribution or approval to the fraud
The management of ZZZZ BEST Company was evidently involved in covering up the fraud activities of the company (Baliga 8). These include the fact that it helped its CEO, Barry Minkow, to carry out his illegal acts. (Baliga 14). Based on this reasoning, the management evidently and with substantial knowledge contributed to approving the fraud activities by Barry Minkow.
Another incidence where the ZZZZ management contributed to approving the fraud is evident in the event when Larry Gray, an engagement audit partner for ZZZZ BEST demanded to visit their restoration contract sites in Sacramento. According to available information, there was no site in existence (Wells 16). However, Barry Minkow commissioned his employees to go and find a building either under construction or renovation to cite it as their multimillion-dollar contract. The execution of this plan meant that the management approved the fraud.
The auditors on the other side are to be blamed for their failure to identify, prevent, and report the fraud. When Greenspan was the company’s auditor, it is evident that the fraud was taking place. However, instead of reporting or preventing it, he decided to quit his post, a factor that never solved the problem (Berman 19). Still, he failed to involve the incoming audit company in his audit reports and any irregularities.
Another auditor contribution was by ERNST & WHINNEY. According to the investigation into the matter, ERNST & WHINNEY should have had insight after conducting an audit of the company’s financial statements for the three months ending July 31, 1986, that there were some irregularities (Akst). Even with the objection from the company on visiting their insurance restoration contract sites, the auditor did nothing to force for evidence. This, coupled with failure to report the irregularities when they resigned is indicative of their failure to prevent the ZZZZ BEST fraud.
Recommendations on identification or prevention of the fraud by the auditor
The sole purpose of an auditor is to conduct an authentic audit of the financial statements of an organization. This means that they must gain access to any information cited in the financial statement. Based on this reasoning the auditors of the ZZZZ BEST could have identified or prevented the fraud by qualifying any information that was given in the statements (Lieberman). The growth of the ZZZZ BEST carpeting company was abnormally huge compared to other similar companies in the country. This could have served as a source for suspicion among the auditing officials.
None of the auditors to the ZZZZ BEST gained access to the actual finance dealing of the company (Wells 23). However, the law gives an auditor the power to refuse to authenticate a financial statement upon failing to find substantial proof of the figures. Therefore, the auditor should provoke such legal provisions to enforce effective preparation of financial statements with sufficient levels of accuracy and backed by available support on demand (Lieberman). Auditors must always dictate the provision of tangible evidence of a culture of integrity from a company.
Explanation of GAAP violation
The ZZZZ BEST fraud case violated various GAAP principles. First, the accounting practices in ZZZZ BEST did not follow the principle of regularity (Lieberman). This is because; such practices never at any level followed the underlying rules and laws on accounting standards. Another violated principle is that of prudence. It is a crime for an accountant to give or record financial information that is not certain. However, most of the financial statements given by the ZZZZ BEST were corrupted (Akst).
According to the GAAP, it is mandatory for a company to allow coherence and comparison of its financial statements (Lieberman). This means that it has to give sufficient evidence of the stated amounts in the statement. Nevertheless, this was evidently missing in ZZZZ best financial statements. Therefore, ZZZZ BEST violated the GAAP principle of permanence of methods. Other GAAP violations are the principles of full disclosure and utmost good faith as well as those of sincerity in preparing financial statements (Lieberman).
Excepts from SEC reports/releases
The function of the SEC is to protect the investment of securities investors while still promoting the business interests of listed companies (Berman 27). However, in the case of ZZZZ Best, the SEC failed in protecting the financial interests of securities investors. This is because, how the shares of ZZZZ Best grew in value for a short time remained questionable given the fact that it was never quite commonly known in the public domain (Lieberman). Therefore, SEC reports and releases should be guided by accurate and reliable financial information from the company. This is quite crucial in mitigating fraud dealing in the securities market.
Conclusion
The rise and fall of Barry Minkow signify the struggles of a brilliant youth to earn a sustainable livelihood from a humble background. He struggled with the problem of finances for his business leading to the indulgence in illegal sourcing of funds for the company. However, the fraud activities are to be termed as a failure by auditors, legal counsels, and SEC, whom played a big role in failing to identify or prevent the fraud. This is why the Sarbanes-Oxley should be seen as a solution to the problem of financial scandals by companies.
Works cited
Akst, Daniel. “ZZZZ Best Founder Minkow Indicated on Racketeering and fraud Charges.” ZZZZ Best Founder Minkow Indicated on Racketeering and fraud Charges. 1988. Web.
Baliga, Wayne. “U.S. District Court makes Summary Judgment Ruling.” Journal of Accountancy 179 (1995): 8-46
Berman, Ron. “Ernst & Young Not Liable in zzzz Best Case.” Journal of Accountancy 172 (1991): 4-31.
Lieberman, Paul. “Last Loose End Wrapped Up in ZZZZ Best Fraud Case.” Last Loose End Wrapped Up in ZZZZ Best Fraud Case. 1994. Web.
Wells, Joseph. “Follow Fraud to the Likely Perp.” Journal of Accountancy 191 (2001): 16-33.