ZZZZ Best Company Fraud: Case Study

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ZZZZ Best Company Fraud Case Study

1)At an early age, Barry Minkow was introduced to the carpet cleaning industry by his mother who worked part time as a telephone solicitor for a small carpet cleaning company. This insight of the industry allowed Minkow to understand that the carpet cleaning industry was one which had very few barriers to entry, no licensing requirements, and required only a small amount of capital to enter. Also, because of these few barriers to entry, the industry has historically attracted a larger number of faulty startups in comparison to other industries. At 16 years old, Minkow started his carpet cleaning company under the name of ZZZZ Best Company. Right away he had a difficult time with customer complaints, stringent competition, and the inability to collect all checks, and vendors insistent on collecting payments. These all combined together prevented ZZZZ Best from becoming anything but marginally profitable, which was a red flag for banks who wouldn’t lend Minkow money. The fraud started when Minkow started to come up with his own innovative ways to finance his business, including: check kiting, credit card forgeries, and the staging of thefts to fleece his insurance company. Minkow was smooth and had charm which allowed all of these false financing options to be possible. Minkow’s success at beating the system encouraged him to further exploit fraudulent activities in different areas. Minkow befriended numerous friends whom aided his fraudulent activities, including an insurance claims adjuster. Minkow promised to pay this adjuster $100 per week if he would confirm to banks that ZZZZ Best was the recipient of occasional insurance restoration contracts. Minkow used these phony insurance restoration contracts to generate the paper profits and revenues that were needed to convince bankers to loan his business money. Minkow also created phony financial statements in order to complete these loans. Soon, insurance restoration became the main source of revenue for ZZZZ Best. Minkow established six different fake companies as fake vendors and other companies for the purpose of generating these fake insurance restoration contracts for ZZZZ Best. Through these fake insurance restoration contracts, the large majority of ZZZZ Best’s revenues were completely made up. The plans were to take this fraudulent company public until a journalist started the company’s downfall by realizing that ZZZZ Best did not have a real contractor’s license number. This was the first step into her proving that the company was fraudulent. Numerous CPA’s, lawyers, and bankers failed to realize this and were unable to detect the fraud. The stakeholders that were affected throughout this fraud were Barry Minkow, Mark Morze, all of the CPA and law firms that worked with ZZZZ Best, the banks that had outstanding loans to the company, employees of the ZZZZ Best carpet cleaning business, and others that were in operations with ZZZZ Best Company.

2) There were key management assertions throughout the process which were either inaccurate, or completely false. These assertions included the areas of accurate transactions and account balances, and presentation and disclosure. First ZZZZ Best company had falsified up to 100 insurance restoration contracts, and went through the trouble of creating false documentation and false transactions to completely cover up for these false contracts. When auditors, banks, and other institutions went through to check these contracts, enough false evidence was created that no serious suspicions arose. Occurrence is the main assertion that was missing during ZZZZ Best’s fraudulent history. Transactions and restoration contracts just were not reality, and did not actually exist. The rest of the management assertions including completeness, accuracy, cutoff, and classification are all inexistent because occurrence was not existent. Barry Minkow covered up his fraudulent...
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