Case 5-2
ZZZZ Best
The story of ZZZZ Best is one of greed and audaciousness. It is the story of a 15-year-old boy from Reseda,
California, who was driven to be successful regardless of the costs. His name is Barry Minkow.
Minkow had high hopes to make it big—to be a millionaire very early in life. He started a carpet cleaning
business in the garage of his home. Minkow realized early on that he was not going to become a millionaire
cleaning other people’s carpets. He had bigger plans than that. Minkow was going to make it big in the
insurance restoration business. In other words, ZZZZ Best would contract to do carpet and drapery cleaning
jobs after a fire or flood. Because the damage from the fire or flood would be covered by insurance, the
customer would be eager to have the work done. The only problem with Minkow’s insurance restoration idea
was that it was all a fiction. There were no insurance restoration jobs, at least for ZZZZ Best. Allegedly, over
80 percent of his revenue was from this work. In the process of creating the fraud, Minkow was able to dupe
the auditors, Ernst & Whinney (predecessor firm to Ernst & Young), into thinking the insurance restoration
business was real. The auditors never caught on until it was too late.
How Barry Became a Fraudster
Minkow wrote a book, Clean Sweep: A Story of Compromise, Corruption, Collapse, and Comeback, that
provides some insights into the mind of a 15-year-old kid who was called a “wonder boy” on Wall Street
until the bubble burst. He was trying to find a way to drum up customers for his fledgling carpet cleaning
business. One day, while he was alone in the garage-office, Minkow called Channel 4 in Los Angeles. He
disguised his voice so he wouldn’t sound not like a teenager and told a producer that he had just had his
carpets cleaned by the 16-year-old owner of ZZZZ Best. He sold the producer on the idea that it would be
good for society to hear the success story about a high school junior running his own business. The producer
bought it lock, stock, and carpet cleaner. Minkow gave the producer the phone number of ZZZZ Best and
waited. It took less than five minutes for the call to come in. Minkow answered the phone and when the
producer asked to speak with Mr. Barry Minkow, Minkow said: “Who may I say is calling?” Within days, a
film crew was in his garage shooting ZZZZ Best at work. The story aired that night and it was followed by
more calls from radio stations and other television shows wanting to do interviews. The calls flooded in with
customers demanding that Barry Minkow personally clean their carpets.
As his income increased in the spring of 1983, Minkow found it increasingly difficult to run the company
without a checking account. He managed to find a banker that was so moved by his story that the banker
would agree to allow someone under aged customer to open a checking account. Minkow used the money to
buy cleaning supplies and other necessities. Even though his business was growing, Minkow ran into trouble
paying back loans and interest when due.
Minkow developed a plan of action. He was tired of worrying about not having enough money. He went
to his garage—where all his great ideas first began—and looked at his bank account statement, which showed
that he had more money than he thought he had based on his own records. Minkow soon realized it was
because some checks he had written had not been cashed by customers so they didn’t yet show up on the
bank statement. Voila! Minkow started to kite checks between two or more banks. He would write a check
on one ZZZZ Best account and deposit it into another. Because it might take a few days for the check written
on Bank #1 to clear that bank’s records (back then, checks weren’t always processed in real time the way
they are today), Minkow could pay some bills out of the second account and Bank #1 would not know—at
least for a few days—that Minkow had written a check on his account when, in reality, he had a negative
balance. The bank didn’t know it because some of the checks that Minkow had written before the visit to
Bank #2 had not cleared his account in Bank #1.
It wasn’t long thereafter that Minkow realized he could kite checks big time. Not only that, he could make
the transfer of funds at the end of a month or a year and show a higher balance than really existed in Bank #1
and carry it on to the balance sheet. Since Minkow did not count the check written on his account in Bank #1
as an outstanding check, he was able to double-count.
Time to Expand the Fraud
Over time, Minkow moved on to bigger and bigger frauds like having his trusted cohorts confirm to banks
and other interested parties that ZZZZ Best was doing insurance restoration jobs. Minkow used the phony
jobs and phony revenue to convince bankers to make loans to ZZZZ Best. He had cash remittance forms
made up from nonexistent customers with whatever sales amount he wanted to appear on the document. He
even had a co-conspirator write on the bogus remittance form, “job well done.” Minkow could then show a
lot more revenue than he was really making.
Minkow’s phony financial statements enabled him to borrow more and more money and expand the
number of carpet cleaning outlets. However, Minkow’s personal tastes had become increasingly more
expensive including purchasing a Ferrari with the borrowed funds and putting a down payment on a 5,000–
square-foot home. So, the question was: How do you solve a perpetual cash flow problem? You go public!
That’s right, Minkow made a public offering of stock in ZZZZ Best. Of course he owned a majority of the
stock to maintain control of the company.
Minkow had made it to the big leagues. He was on Wall Street. He had investment bankers, CPAs, and
attorneys all working for him—the now 19-year-old kid from Reseda, California, who had turned a mom
and pop operation into a publicly owned corporation.
Barry Goes Public
Minkow’s first audit was for the 12 months ended April 30, 1986. A sole practitioner performed the audit.
(There are eerie similarities in the Madoff fraud with its small practitioner firm—Friehling & Horowitz—
conducting the audit of a multibillion-dollar operation and that of the sole practitioner audit of ZZZZ Best.)
Minkow had established two phony front companies that allegedly placed insurance restoration jobs for
ZZZZ Best. He had one of his cohorts create invoices for services and respond to questions about the
company. There was enough paperwork to fool the auditor into thinking the jobs were real and the revenue
was supportable. However, the auditor never visited any of the insurance restoration sites. If he had done so,
there would have been no question in his mind that ZZZZ Best was a big fraud.
Pressured to get a big-time CPA firm to do his audit as he moved into the big leagues, Minkow hired Ernst
& Whinney to perform the April 30, 1987, fiscal year-end audit. Minkow continued to be one step ahead of
the auditors – that is, until the Ernst & Whinney auditors insisted on going to see an insurance restoration
site. They wanted to confirm that all the business—all the revenues—that Minkow had said were coming in
to ZZZZ Best was real.
The engagement partner drove to an area in Sacramento, California, where Minkow did a lot of work—
supposedly. He looked for a building that seemed to be a restoration job. Why he did that isn’t clear, but he
identified a building that seemed to be the kind that would be a restoration job in process.
Earlier in the week, Minkow had sent one of his cohorts to find a large building in Sacramento that
appeared to be a restoration site. As luck would have it, Minkow’s associate picked out the same site as had
the partner later on. Minkow’s cohorts found the leasing agent for the building. They convinced the agent to
give them the keys so that they could show the building to some potential tenants over the weekend.
Minkow’s helpers went up to the site before the arrival of the partner and placed placards on the walls that
indicated ZZZZ Best was the contractor for the building restoration. In fact, the building was not fully
constructed at the time but it looked as if some restoration work would have been going on at the site.
Minkow was able to pull it off in part due to luck and in part because the Ernst and Whinney auditors did
not want to lose the ZZZZ Best account. It had become a large revenue producer for the firm and Minkow
seemed destined for greater and greater achievements. Minkow was smart and used the leverage of the
auditors not wanting to lose the ZZZZ Best account as a way to complain whenever they became too curious
about the insurance restoration jobs. He would even threaten to take away his business from Ernst and
Whinney and give it to other auditors.
Minkow also took a precaution with the site visit. He had the auditors sign a confidentiality agreement
that they would not make any follow-up calls to any contractors, insurance companies, the building owner,
or other individuals involved in the restoration work. This prevented the auditors from corroborating the
