Financial Statement Fraud: Lessons from the Zzzz Best Case
ACC 461 Auditing
Financial Statement Fraud: Lessons from the ZZZZ Best Case
The video “Cooking the Books” discussed the ZZZZ Best case of fraud, it tells how and why fraud was perpetrated by Barry Minkow and why it was undetected for so long. According to the video, ZZZZ Best was founded by Barry Minkow in 1982; when he was sixteen years old, it started as a carpet cleaning company. But, due to high competition in the industry, low entry barriers, and bad internal control, this young entrepreneur started to have cash flow problems, thus creating a shortage of working capital. 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. 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.
Discussion Questions:
1. Discuss an auditor’s responsibility for detecting material misstatement of financial statements.
An auditor must gather all information needed to identify risks of material misstatement of financial statements. They have to assess these risks after taking into account an evaluation of the company’s books, industry trends and internal control. It is also an auditor’s responsibility to gather and consider much more information to assess than they have in the past. They need to present a professional skeptical mind on their engagements, particularly during audit planning and evaluation of audit evidence. They must set aside past relationships/friendships and not assume that all clients are honest. At the end of the audit, the auditors must make sure that they have obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. 2.
Financial Statement Fraud: Lessons from the ZZZZ Best Case
The video “Cooking the Books” discussed the ZZZZ Best case of fraud, it tells how and why fraud was perpetrated by Barry Minkow and why it was undetected for so long. According to the video, ZZZZ Best was founded by Barry Minkow in 1982; when he was sixteen years old, it started as a carpet cleaning company. But, due to high competition in the industry, low entry barriers, and bad internal control, this young entrepreneur started to have cash flow problems, thus creating a shortage of working capital. 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. 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.
Discussion Questions:
1. Discuss an auditor’s responsibility for detecting material misstatement of financial statements.
An auditor must gather all information needed to identify risks of material misstatement of financial statements. They have to assess these risks after taking into account an evaluation of the company’s books, industry trends and internal control. It is also an auditor’s responsibility to gather and consider much more information to assess than they have in the past. They need to present a professional skeptical mind on their engagements, particularly during audit planning and evaluation of audit evidence. They must set aside past relationships/friendships and not assume that all clients are honest. At the end of the audit, the auditors must make sure that they have obtained reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. 2.