Barry Minkow started a carpet cleaning business in his garage at the age of 16. One year later, Barry decided that hid business does not bring him much profit and began his fraudulent activities. He was running false credit card charges on clients' cards and check kiting. However, he was able to commit fraud on a large scale, when he gathered enough of a balance sheet built off fraudulent transactions. His major crimes were perpetrated against banks and investors by committing financial statement fraud.
Such activities enabled him to obtain cash through bank loans and investment funds. Barry had fixed assets on the balance sheet that were fictitious. However, his major falsification was from grossly overstated revenue from restoration projects. His carpet cleaning company had morphed into a restoration-remediation company seemingly overnight, which greatly increased his revenue without increasing transaction volume. In order to validate the contracts, he set up two shadow companies whose sole purpose were to provide proof that the contracts were real.
In addition, he hired conspirators to work in those companies to not only verbally tell the auditors that the contracts were real, but even to set up fake work site visits to further confirm the validity of the contracts. 1. Do you believe that auditors should be held liable for failing to discover fraud in situations such ZZZZ Best where top management goes to great lengths to fool the auditors? Why or why not? First of all, ZZZZ Best had two auditors who really could have caught something, but limited time on the audit and resources made that difficult.
George Greenspan, the sole practitioner who performed the audit, was making telephone calls and also performed confirmatory work regarding renting sites. However, by that time the renting site was willing to participate in Minkow’s fraudulent schemes. In addition, independent auditors have much fewer resources in terms of money to travel and, more importantly, time. Greespan was working on the engagement alone. He was reviewing paper documents manually, not soft files that auditors are able to manipulate and do analytics very quickly on like they are today.
It was, most likely, just too much for one person to handle. I believe that Greespan should not be liable for the work performed. In addition, the first year of an audit contains a lot of simply learning the business. A CPA company Ernst & Whinney was also learning their client business when they did a review of the three months ending July 31, 1986. They clearly had more resources as a Big 8 firm, but they never actually gave an opinion on their financial statements. What is more engaging, that E&W caught the problem, but they just did not report it.