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Case Study: Barry Minkow (ZZZZ Best Company) – Once a Fraud, Always a Fraud
Barry Minkow founded a Carpet Cleaning company named ZZZZ Best. ZZZZ Best
appeared as an instant success; however, it was actually a front to attract investments. Business
pressures and unpaid bills caused Minkow to commit accounting fraud and had a fake
restoration business.
Minkow, at the start of his business, struggled to pay and meet the expenses of the
ZZZZ Best. His business accounts in the two banks were closed because he is only a minor
back then and the Law did not allow minors to sign binding contracts, including checks.
Suppliers began to demand for payment and he began to receive complaints from several
customers. He took ZZZZ Best public and began to sell shares. However, the company began
to rapidly decline.
The company did not make profit and mainly operated on borrowing funds, according
to an investigation report. To engage with the loan providers, he opened a fictitious damaged
buildings restoration business, and he listed the company in the public stock market.
Nevertheless, despite this instant success of his business, almost all its revenues (almost
80 percent of his revenue) came from the fictitiously recorded receivables. To protect their
fraud activities, he and his other two associates engaged in making fake invoices for sales as
well as fake customer remittance checks. The production of these phony documents was so
skillfully done using photocopying equipment that the company auditors accepted them as
evidence that actual sales or receivables transactions occurred in the company. The ZZZZ Best
Company’s assets reportedly grew and the success continue due to failure by the auditors to
identify the fraud activities.

Also, the company engaged in overbilling carpet cleaning customers through their
credit cards. Due to complains of overbilling by one carpet cleaning customer, the ZZZZ Best
Carpeting Fraud scam came to be exposed. The company’s unethical behaviors went public by
the media thus prompting law enforcement investigation into the company operations. These
investigations led to the arresting, charging and convicting of Barry Minkow and his business
associates for engaging in fraudulent activities. He was sentenced for 25 years. Thus, the ZZZZ
Best Company assets were forced to sale by the government to compensate victims of the fraud
scam. However, despite the fact that the assets were estimated at $240 million, the sale of the
assets only brought to the company an approximated less than $50 thousand in cash.

The failure of auditing firms to uphold ethical and effective accounting practices caused
the ZZZZ Best fraud. Through an investigation into the ZZZ Best case, it was found out that
the company had operated for an estimated five years by using fictitious sales invoice and
customer remittance checks as a source document for the company receivables. The very close
interrelation between financial statements, documented receivables and asset worth of the
company were missing in the ZZZZ Best Company, which is according to the principles of
accounting the very close interrelation between financial statements, documented receivables
and asset worthy of the company should be present. The missing correlation in the ZZZZ Best
was not exposed by the auditors.

Another reason that should be blamed for the ZZZZ Best Company Fraud case is the
poor banking and loan providing practices. The company engaged in check kitting to have a

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successful loan in and out of three banks despite having the fact that ZZZZ Best did not make
real profits. This is a failure of the banking sector. They failed to qualify financial statements
of companies, validate checks and check the creditworthiness of the business before giving a
loan.

It can also be seen that the ZZZZ Best’s shares grew in value in a short period of time
even though it was never quite commonly known publicly. This is also one of the suspected
causes of the fraud, the stocks exchange commissioners, brokers and stocks investment advices.

There are also problems in the auditing process. The auditors fail to check underlying
documents, for example the contracts did not contain details and specification of work to be
done. They also fail to properly review the financial statements which could be due to auditor’s
lack of knowledge for the industry and the client’s business. The auditor did not properly
evaluate the company’s internal control. They also failed to identify insured party, insurance
company and location of jobs.

The fraud could have been prevented, first, if a third-party firm that has no relationship
with client was asked by the auditor to confirm audit report. Secondly, the auditor should
observe the documentation of assets to confirm the validity, for example, visiting sites of jobs
and checking with contractors and owners of building to confirm the existence of assets and
on-going projects. Thirdly, the procedures should be improved to prove authenticity of
payments and accounts, for example, doing vouching and tracing and company walkthroughs
to gain understanding of the company’s operation. Lastly, they should develop procedures to
ensure investors’ protection, for example, the auditors should inform the officials of any
suspected fraud and report the fraud findings, and improve the auditors’ diligences and
responsibilities. Auditors should evaluate client’s internal control as well as their past and
current accounting practices. They should also do ratio analysis to compare the changes in
numbers from year-to-year, for ZZZZ Best’s case, the debt-to-equity ratio and return on equity.
Ratio analysis will be really helpful for fraud detecting.

ZZZZ Best Company Fraud case showed the weakness of auditing, banking and stock
exchange practices in the economy. The government must invest more of the resources to
enforce anti-fraud laws as well as enact and implement effective laws to protect investors from
frauds.

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