ZZZZ Best company - Assignment Example

“ZZZZ Best Company” ZZZZ Company was located in heart of Southern California in San Fernado Valley. It commenced its operationsin 1982 by offering door-door carpet cleaning services. CASE STUDY Key players Client: ZZZZ Best Company It is an excellent and famous carpet cleaning company, which is located in San Fernado valley in the Southern part of California. The company embraces a hierarchical structure of management with the Barry Minkow as the chief executive director. Accountants 1. Mr. GreenSpan 2. Mr. Ernet & Whinney Third Parties The wall Street Brokerage Houses The Banks and other financial institutions Carpet Cleaning Industry Review This industry is relatively easy to join, particular the small amount of capital required. Despite stiff competition in this industry, most players are legitimate and do their businesses in an honest manner. The industry attracts various kinds of people. They can be young old, poor or rich. The entry requirements such as the license are easily attained. Some of the challenges that most of the players face in this industry include client’s complaints, payment of vendors and delay of payment. Mr. Barry Minkow In his tender years around age 12, he was introduced into the industry of carpet cleaning, by his mother. After working for sometime, he formed his company the ZZZZ Best and began operations, at the age of 16 years. He used his entrepreneurial skills and smart minds to expand the company’s capital base. Minkow had an outstanding personality, which he later applies in creating a series of network, which helps his business to thrive into a fictitious multimillionaire empire within a short period. Mr. Minkow operated his company with a lot of caution in his bid to hide the fictitious business. For instance, he hires an accountant for a year in order to subdue an audit trail. This incident is seen when Mr. Greenspan, is resigned from his work, without proper procedures. The ZZZZ Best Company The young entrepreneur Mr. Barry Minkow as the chief executive officer formed this company in 1982. It operated privately until 1986, when it went public. The company carried out operations in carpet cleaning until such time when Mr. Minkow realized difficulties in raising capital for the business. Minkow used the Company to get loans from financial institutions, which believed the financial values presented to them. The Company began numerous outlets across the valley of San Fernando. Later, the company was involved in insurance restoration business, which helped in expanding the company’s financial base. The company’s fraudulent activities were discovered after a close examination of its financial statements for the period ended 30 April 1986. ZZZZ Best Company operated from 1982 to 1987 when, it was at its peak; Mr. Barry Minikow was detected to have been using fictitious financial values to hoax investors who included individuals and financial institutions. The detection followed a series of financial investigation aimed at real disclosures of the company’s financial operations. Consider the following tabular period of the company from its inception to liquidation Development time line 1982 1983-1984 1985 1986 1987 1987 ZZZZ Best Company founded Capital problems, low business activity Net income of less than $200,000 Engagement in fraud through an insurance agent The company went into the public domain Conned Wall Street and close allies millions of dollars Minkow’s stock exceeded the market value of $100 million Total market value surpassed $200 million July: The Company’s assets auctioned at $62,000 Discovery of fraud and arrest of the CEO- founder Sentenced to 25 years Fraud (Ponzi scheme) ZZZZ Best Company was primarily formed to perform carpet cleaning operations and some small repair jobs. The director begun to use the company for schemes of fraud barely a few years after its formation, and this formed the foundation of the Ponzi fraud scheme. The fraud begun with misstatement of financial statements with the help of one Tom Padgett with a promise of paying $100 per week upon agreeing to confirm the contents of the statements on phone to third parties, such as the banks. The company began engaging in the insurance restoration business. This involve faked Sacramento project among others. The transactions of this business are used in misstated financial statements to woo investors into investing in the company. By 1987, the company had a net income of over $5 million on revenues of $50 million. The market stock value of Minkow was $100 million, with the total market value of $200 million in 1987. The fraud began by a whistle from the a Los Angeles Times, which reported Minkow of his involvement in credit card misrepresentation. An informant called in the audit firm to give information on the state of the ZZZZ Best Company. This created suspicion. Together with a string of other suspicious activities such as the discovery of the numerous canceled checks on 29 May 1987, the ERNST & WHINNEY resigns by presenting a report to the SEC. Consider the following breakdown of the fraudulent activities and vendors Vendors Amount Detail ZZZZ Best $1, 970,000 Electric generators Interstate and Sacramento $ 7,000,000 and $40-100 million respectively Restoration The Audit The Securities and Exchange Commission (SEC) failed to detect the fraudulent activities of Minkow. Similarly, Mr. Greenspan an independent auditor failed to detect the fictitious business activities. Additionally, the ERNST &WHINNEY firm representatives failed to unearth the real business that ZZZZ Best Company was involved in, despite their suspicion. It is until an unknown individual presents a letter detailing the fictitious transactions, that the congressional committee gets a lead to the fraudulent activities that ZZZZ Best Company under the leadership of Mr. Minkow were discovered (Michael, 1). Court Rulings After the Congressional committee’s discovery of the fraudulent activities of the ZZZZ Best Company, the committee moved to get more evidence from earlier auditors. However, letter by an individual dated 9 June 1987 offered substantial lead and evidence on the fictitious transactions Rulings The ERNEST & WHINNEY declared innocent and not liable to the looses made by the investors Mr. Minkow sentenced to 25 years on 57 counts The fraud declared the largest civil suit that was well orchestrated Minkow was released in 1994 on grounds of working hard to improve his conduct Work Cited Knapp, Michael C. Contemporary Auditing: Real Issues and Cases. Mason, Ohio: Thomson/South-Western, 2004. Print. Read More