ZZZZ Best Company

One of the most elaborate and frauds in the United States corporate history was done by a man named Barry Minkow during the 1980s. At the age of 12 Barry got involved with the carpet cleaning business through his mother.

One of the good things for a young person of Barry’s age is that this industry is fairly simple to get into. Therefore it required no prerequisite abilities or permits. However what Barry Minkow did not expect was the high tolerance required in order to run such a business. It was a thankless job and Barry had a hard time making a profit.His company was not able to sustain capital through the operations of the business. He tried to apply loans from banks but to no avail.

The banks would reject him because of the low amount of collateral he had. This caused Barry Minkow to turn to other means of capital creation fraud and dishonesty. Barry Minkow himself was a very charismatic and socially adept person. In order to provide his business with a steady flow of capital he first turned to the basic levels of fraud such as check and credit card fraud.However it seemed like the credit card and check kiting was not sufficient enough to satisfy the needs of his “growing” business. He had come to the conclusion that insurance restoration contracts would be a good way of injecting a large amount of capital in his business.

The problem was that his business was not capable enough to handle big restoration contracts thus leading to the fact that he had no customers in that regard. Therefore in order to give the impression he was getting these contracts he befriended an insurance claims adjustor named Tom Padgett. He asked Mr.Padgett that he was having a hard time getting through the beauracratic nature of the insurance business.

Therefore if anyone called Mr. Padgett about ZZZZ Best and inquired about insurance restoration contracts all he had to do was say yes they had contracted ZZZZ Best to do some restoration work. This worked like a charm for Barry Minkow. He was not only able to show company profits on paper but also due to these profits he was able to get much more sizable loans from Banks. He also utilized these fraudulent financial statements to gain the interest of wealthy investors for his company.It came to a point that restoration was the dominant form of income on his fake financials.

Barry Minkow realized that in order to keep his investors interested in his business he needed to show more inflow of capital. Therefore he decided that it was time to make ZZZZ Best into a public company. The sale of publicly offered stock would ensure that enormous amounts of cash would flow into the companys coffers. However in order to do this he would need to register with the SEC.

The SEC required full audit of ZZZZ Bests’s financials by an independent contractor. The audit was done by George Greenspan.Barry Minkow was able to convince Mr. Greenspan of the legitimacy of the insurance contracts by having him call his partner in crime Tom Padgett.

Once the audit was completed by Mr. Greenspan, ZZZZ Best hired an auditing firm called Ernst and Whitney. The auditors of Ernst and Whitney tried to do their due diligence the best they could when they first started. When they wanted to physically visit a location where the restoration was supposedly being done Barry Minkow devised elaborate schemes like bribing gaurds outside of old buildings to say that yes Restoration work was being done by ZZZZ Best.If the auditors felt uncomfortable about something they were given veiled threats by Barry Minkow that he would utilize the services of other auditing firms if Ernst and Young did not give them a favorable audit;.

The auditors in fear of losing a big contract like ZZZZ Best would do as they were requested. However the party and fake financial security that ZZZZ Best had been enjoying would all come falling apart by the unlikeliest of means. A customer that had been overcharged on her credit card was refused a refund by Barry Minkow.This customer brought this to the attention of the Los Angeles Times. After some investigation revealing the possible falsehood of ZZZZ Bests financials all of Barry Minkows deceitful work had come to an end. Despite some last minute risky moves to save ZZZZ Best the company was no more 3 months later.

This case was informative in the sense that it caused not only SEC filing procedures to be changed but it forced the Auditing regulations to be amended. It tried to take a look at what the Auditors had overlooked.A key example of this oversight was not having adequate information about the restoration business to make an informed judgment about the company’s financials. They did not know what to look for and thus they did not look for it. But despite this they gave ZZZZ Best’s financials the approval just to keep the company as a client. Many key points in the ethics and regulations of audits have been made after this case exploded in the late 1980s.

However the auditing system has to make sure that it keeps evolving on a regular basis because as Barry Minkow mentioned after this debacle that it was easy for him to work the system.