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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. Although this case dates back over 30 years, it does serve as an example of what
can happen when auditors do not look too hard to find fraud.
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, but that he could in the insurance
restoration business. In other words, ZZZZ Best would contract to do carpet and drapery
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 his garage-
office, Minkow called Channel 4 in Los Angeles. He disguised his voice so he wouldn’t sound
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
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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. Voilá! 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
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.
Barry Goes Public
Pressured to get a big-time CPA firm to do his audit by the underwriting firm selling his stock,
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 revenue—that Minkow had said was coming in to ZZZZ Best was real.
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The Fraud Starts to Unravel
It was a Los Angeles housewife who started the problems for ZZZZ Best that would eventually
lead to the company’s demise. Because Minkow was a well-known figure and flamboyant
character, the Los Angeles Times did a story about the carpet cleaning business. The Los Angeles
housewife read the story about Minkow and recalled that ZZZZ Best had overcharged her for
services in the early years by increasing the amount of the credit card charge for its carpet
cleaning services.
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Legal Liability Issues
The ZZZZ Best fraud was one of the largest of its time. ZZZZ Best reportedly settled a
shareholder class action lawsuit for $35 million. Ernst & Whinney was sued by a bank that had
made a multimillion-dollar loan based on the financial statements for the three-month period
ending July 31, 1986. The bank claimed that it had relied on the review report issued by Ernst &
Whinney in granting the loan to ZZZZ Best. However, the firm had indicated in its review report
Questions
1. Do you believe that auditors should be held liable for failing to discover fraud in
situations such as ZZZZ Best, where top management goes to great lengths to fool
the auditors? Explain.
Auditors should be held liable for failing to plan and perform the audit to discover material fraud.
There were many red flags that the auditors could have observed and been tipped off to the fraud. The
amount and type of restoration work by ZZZZ Best defied common sense. The auditors could have
done a reasonableness test by determining the amount of square footage under restoration in the area;
the newspapers coverage of the occurrences; and how much of a share of the work was given to
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2. Discuss the red flags that existed in the ZZZZ Best case and evaluate Ernst &
Whinney’s efforts with respect to fraud risk assessment. Criticize the firm’s
approach to the audit from a professional judgment perspective.
The red flags include rapid growth, kiting of bank transfers, cohorts confirming insurance restoration
jobs, consistency of all the invoices, extravagant life style, a bigger than life founder, cash flow
problems, and problems meeting loan payments.
Ernst & Whinney did not want to lose ZZZZ Best as an audit client; after all Barry Minkow was the
wiz kid on Wall Street. In his book, Clean Sweep: The Inside Story of the Zzzz Best Scam… One of
Wall Street’s Biggest Frauds, Minkow discusses having parties with partners and managers of Ernst
& Whinney and inviting their wives. He knew that the wives would talk about what a nice young man
3. These are selected numbers from the financial statements of ZZZZ Best for fiscal
years 1985 and 1986:
1985
1986
Sales
$1,240,524
$4,845,347
Cost of goods sold
576,694
2,050,779
Accounts receivable
693,773
Cash
Current liabilities
1,768,435
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a. What is the purpose of performing analytical review procedures in an audit
performed under GAAS? What calculations or analyses would you make
with these numbers that might help you assess whether the financial
relationships are “reasonable”?
b. Given the facts of the case, what inquiries might you make of management
based on your analysis?
Answering a) and b) together, we have the following explanations.
Between 1985 and 1986 there is a 390% increase in Sales and 350% increase in Cost of Goods Sold.
The auditors should question the increase in accounts receivable, which was 33% of sales and
represents four months on an annualized basis. The auditors should question where the cash is from:
Barry: The Afterlife
After being released from jail in 1997, Minkow became a preacher and a fraud investigator, and
he spoke at schools about ethics. He had established a reputation of trust as a pastor in the
Community Bible Church in San Diego that he had served after being released from prison.
However, over time his greedy nature got the better of him. He admitted that he tricked a
widower into making a $75,000 donation for a hospital in Sudan to honor his wife after she died
of cancer. Only there was no hospital, and Minkow pocketed the money. Minkow also admitted,
among others things, that he stole $300,000 from a widowed grandmother who was trying to
raise her teenage granddaughter. In addition, Minkow confessed to diverting church member
donations for his own benefit and embezzling money intended as church donations. In all,
Minkow admitted stealing—and concealing from the IRS—at least $3 million from church
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Once again, Barry’s true self got the better of him and in 2009, he issued a report accusing the
major homebuilder Lennar of massive fraud. Minkow claimed that irregularities in Lennar’s off–
balance-sheet debt accounting were evidence of a massive Ponzi scheme. He accused Lennar of
not disclosing enough information about this to its shareholders, and also claimed that a Lennar
executive took out a fraudulent personal loan. Minkow denounced Lennar as “a financial crime
in progress” and “a corporate bully.” From January 9, 2009 (when Minkow first made his
accusations), to January 22, 2009, Lennar’s stock tumbled from $11.57 a share to only $6.55.
Minkow issued the report after being contacted by Nicholas Marsch, a San Diego developer who
had filed two lawsuits against Lennar for fraud. One of Marsch’s suits was summarily thrown out
of court, while the other ended with Marsch having to pay Lennar $12 million in counterclaims.
Questions (continued)
4. Why do you think Minkow was able to pull off the fraud at the church for so long
and not be detected?
Scam artists like Minkow are adept at gaining the trust of their flock. They are smooth talkers
and charming people, generally speaking. Barry was no exception. The fact that he was a pastor
in a church gave credibility to whatever he said and whatever requests he made. Who would not
want to believe such a person especially one who was “born again?”