Essay about CASE 1

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Nur Md. Faisal
ACCT - 4501W
Professor – S. Sauber
September 09, 2014

Case 1 ZZZZ Best INC.

Accounting Fraud has been going on for a long time. Investors are the ones that pay the price when the companies they invest in gets in trouble. Investors are now becoming skeptical about investing into a company because they don’t know if the upper management is acting in good faith for the company. In 1982, at the age of 16 Barry Minkow founded ZZZZ Best, a carpet cleaning concern Company. To raise the capital for his company Minkow was attempting several fraudulent activities including credit card scam and fake insurance claims. He starts to reporting fake revenues from "insurance restoration" by misleading financial statements of ZZZZ Best's, to persuade personal loans from banks. ZZZZ Best goes public in 1986 and the stock price of the company increased dynamically based on false and attracting financial reports. In 1987, the insurance restitution contracts accounted for 90% of the annual revenues for the company. Minkow owned half of the company, and he sales his shares in 1987 for a total of $200,000,000. After a few months the financial fraud was reveled and the company loses its value and was sold only for a total of $62,000 in a public auction. Minkow cheated all the parties including bank insurance companies and the investors, most of them were victimized by its false financial report review by ZZZZ Best's independent auditors. After a congressional investigation of ZZZZ Best, the company’s auditors were criticized for their failure to identify the fraudulent activities in the financial reports. Members of the congressional subcommittee concluded by saying that there were lack of professional escapism, prior communication between two parties, and the initial investigation of the ZZZZ Best's forerunner auditors. It will not be wrong if the subcommittee say that the auditors were biased while they were doing the audit or they were ignoring the fact that Minkow was chatting on the financial reports because they were getting paid.

To answer the case questions we can simply say,

1. Auditor’s are responsible to provide reasonable assurance about whether all financial statements are free fraud, material mistake, and its follow (GAAP) Generally Accepted Accounting Principles. In the audit report, auditor gives an opinion and follows GAAS Generally Accepted Accounting standers, to report on the financial statements. Auditor looks over the statements for any material misrepresentation or adjustment that may need to be made. When an Auditor gets the financial statements he begins to evaluate the evidence, by checking the existing assets, recorded revenues, transactions that have occurred, accuracy of the lists of liabilities. Auditors emphasize that the statements are fairly presented after a careful review. When an Auditor chooses to issue a review report, he may also choose not to give an opinion in regards to the financial statements. On the other hand, few auditors collect the financial statements but do not investigate further and do not gather evidence in order to support the numbers given in the financial statements. This type of review report does not provide reasonable assurance that is needed in order to invest in a company or have a better understanding of the company. In the ZZZZ Best case Minkow retained Ernst & Whinney to perform the audit. There is also a critical difference between a review and an audit. A review is a technique of collect primary evidence of client personnel. Alternatively, an audit is the collection of the full range of evidence that is available to an auditor. Auditors use the evidence including physical observation of assets, inspection of source documents, confirmation procedures, and sale/purchased vouchers by the tracing of transactions it is not limited that how much investigation they can do. Reviews are different then audits in terms of collecting evidence,
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