CASE 1.9
ZZZZ BEST COMPANY, INC.
Synopsis
Barry Minkow founded ZZZZ Best Company, a carpet cleaning concern, in 1982 at the age of
16. Within a matter of months, Minkow was engaging in several fraudulent schemes to raise
working capital for his small company, including credit card forgeries and bogus insurance claims.
Minkow soon became even bolder and began reporting fictitious revenues from “insurance
restoration” contracts in ZZZZ Best’s financial statements to induce local banks to grant him loans.
Eventually, the revenues from ZZZZ Best’s insurance restoration “business” became the dominant
by Minkow and his associates on illicit expenditures of all types.
In addition to the investors and creditors that Minkow swindled, among the parties most
victimized by his elaborate scam were ZZZZ Best’s independent auditors. In a congressional
investigation into the collapse of ZZZZ Best, the company’s auditors were criticized for their failure
to expose Minkow’s fraudulent schemes. The investigative subcommittee that sponsored the ZZZZ
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ZZZZ Best Company—Key Facts
1. ZZZZ Best Company, which was initially a small rug-cleaning business, was founded by Barry
Minkow when he was sixteen years-old.
2. Minkow transformed ZZZZ Best into a leading company in the small and highly fragmented
4. Despite the fact that the company effectively existed only on paper, ZZZZ Best’s market
capitalization at one point exceeded $200 million.
6. Ernst & Whinney eventually insisted on visiting some of ZZZZ Best’s insurance restoration job
sites.
8. Minkow demanded that Ernst & Whinney representatives sign a confidentiality agreement prior
9. Because the auditors were not familiar with the insurance restoration industry, they failed to
10. Ernst & Whinney avoided being held civilly liable for the losses resulting from the ZZZZ Best
fraud because the accounting firm never completed an audit of the company.
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Instructional Objectives
1. To stress the importance of professional skepticism on the part of independent auditors.
3. To emphasize the hazards of allowing a client to impose significant constraints on the scope of
an audit.
4. To emphasize the importance and necessity of candid communications between predecessor
and successor auditors.
Suggestions for Use
I often assign the ZZZZ Best case during the first week of the semester, using it as an
introduction to the auditing profession for my students. The outrageousness of Minkow’s scam and
the lengths to which he went to deceive his company’s auditors impress upon students the need for
relevant to the independent auditor’s role, such as, client confidentiality and the collegial
responsibilities of auditors. The case could also be assigned during coverage of the following topics:
client acceptance and continuance, evaluation of audit evidence, and reviews and compilations.
At some point in the presentation of this case, the instructor will want to emphasize that Ernst &
Whinney, the audit firm that is the focus of much of this case, never completed an audit of ZZZZ
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Suggested Solutions to Case Questions
1. The purpose of a review engagement is to obtain a reasonable basis for providing “limited
assurance” that a given client’s financial statements have been prepared in conformity with generally
accepted accounting principles. Essentially, a “clean” review report provides negative assurance,
that is, it discloses only that the auditor (CPA) did not discover any evidence suggesting that the
2. Third party confirmations, in most cases, yield reliable evidence in support of the occurrence
assertion. However, the quality of such evidence is largely dependent upon the nature of the
relationship, if any, that exists between the client and the third party providing the confirmation.
Confirmations provide the highest quality evidence when the third party is independent of the client.
Unfortunately, in the ZZZZ Best case, the individuals who confirmed that the company’s insurance
restoration transactions had “occurred” were not independent of the client. In fact, unknown to Ernst
& Whinney, the parties who returned the confirmations were confederates of Minkow. [Note: The
second stipulation of the confidentiality agreement signed by Ernst & Whinney precluded the audit
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balances may be materially misstated, meaning that any conclusions drawn from such a comparison
are invalid.
3. Payments received by a client on an account receivable do not establish, necessarily, that the
receivable actually existed at some point in time. A client with sufficient funds can easily create
4. Note: At the time the key events in this case transpired, SAS No. 7, “Communications between
Predecessor and Successor Auditors,” was in effect. In 1998, SAS 7 was superseded by SAS No. 84,
which has the same title. There are only minor differences between these two standards. SAS No. 84
is now integrated into AU-C Sections 210 and 510 of the AICPA’s “clarified” Professional
and 4) the predecessor auditor’s understanding as to the reasons for the change in auditors. (Note:
AU-C 210.A31 and AU 315.09 of the AICPA Professional Standards and the PCAOB’s Interim
Standards are the relevant sources of the respective professional auditing standards in this context.)
Following the acceptance of the client by the successor auditor, the latter should ask the client to
authorize the predecessor auditor to allow it (the successor) to review the predecessor’s workpapers.
It is customary for the predecessor auditor to provide the successor auditor with copies of key
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initiate contact with Greenspan. (Of course, theoretically, Minkow could have denied Ernst &
Whinney permission to make the standard SAS 7 inquiries of Greenspan.) As pointed out in the case,
Ernst & Whinney representatives subsequently disputed Greenspan’s testimony by reporting that
they, in fact, had communicated with him prior to accepting ZZZZ Best as a client. However, the
Ernst & Whinney representatives did not testify as to the content or results of those communications.
Following the resignation of Ernst & Whinney, Price Waterhouse contacted that firm and
5. The confidentiality agreement certainly imposed restrictions on the ability of Ernst & Whinney
to corroborate the evidence collected during the site visitations. The second stipulation of that
agreement, shown in Exhibit 3, was particularly limiting. The inability of Ernst & Whinney to
contact the building owner, the insurance company, and other companies or individuals allegedly
involved in, or associated with, the restoration projects precluded the auditors from obtaining
evidence from independent third parties to resolve any questions or issues raised as a result of the
site visitations. Whether the confidentiality agreement improperly limited the scope of Ernst &
Whinney’s audit is a matter of professional judgment. Apparently, members of the audit engagement
team did not believe that the scope of the ZZZZ Best audit was improperly restricted by the
agreement, otherwise they would not have complied with it.
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When constraints of any type imposed by a client prevent auditors from complying, in material
respects, with one or more of the generally accepted auditing standards, a scope limitation has
6. Professional standards do not require that auditors attest to the material accuracy of pre-audit
earnings releases that many public companies make. However, it is customary that client executives