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Case 1.9 ZZZZ Best Co Inc.

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Ryan Demko

on 2 December 2014

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Transcript of Case 1.9 ZZZZ Best Co Inc.

ZZZZ Best Co Inc.
Going Public
Minkow took ZZZZ Best public in 1986
Exponentially increased personal profits
ZZZZ Best subject to fiscal year end public audit by First George Greenspan
Dismissed Greenspan & Retained Ernst & Whinney for following fiscal year
E&W resigned June 2, 1987
Retained Price Waterhouse after E&W resignation

ZZZZ Best Collapse
LA Times article published mid-May 1987 depicting fraud
Small brokerage firm short sold ZZZZ Best stock
Stock price dropped drastically
ZZZZ Best business partners gave more credit to rumors of Minkow's schemes
Minkow reported record profits and revenues again May 28, 1987
ZZZZ Best collapsed in less that three months

Case 1.9 Questions
Background & History
Founder 16 year old Barry Minkow
Started Carpet cleaning business
Located in San Fernando Valley So. CA
Introduced to business at age 12
Turned business into insurance restoration business
Engaged in fraudulent activity early on
Found "business partner" Tom Padgett
Engaged in fraudulent activity and schemed audit companies
Ryan Demko
Hannah McDonough
Brittany Ray
Michael Koprucki

George Greenspan
ZZZZ Best's first public auditor - 1986
Confirmed existence of insurance restoration contracts
Did not visually inspect the sites for existence
Confirmed contracts through Minkow's business partner Tom Padgett
Ernst & Whinney
Retained after dismissal of Greenspan
Visited a false major restoration site
Minkow schemed and fixed the site to resemble ZZZZ Best restoration
Required to sign confidentiality agreement
Resigned from auditing ZZZZ Best due to a series of events
LA times article revealing Minkows childhood frauds
ZZZZ Best press release reporting record profits & revenues without notifying E&W
Evidence supporting an anonymous informants allegations on fictitious restoration sites
Confidentiality Agreement
Question #1
Review vs. Audit
Question #2
Question #4
Part 1
AU 315.08-.10 outlines the guidelines for communications between predecessor and successor auditors
The predecessor-successor communications allow the successor to gain as much knowledge as possible about management and the entity
AU Section 326 (Evidential Matter) states that sufficient appropriate evidence must be collected
Greenspan sent confirmations to Tom Padgett but failed to visually observe the restoration sites therefore not getting sufficient evidence
E&W visited the restoration site but due to collusion by Minkow, and the fake leasing agents, they were misled on the existence of the restoration sites
Third parties such as Tom Padgett, as well ZZZZ Best's law firm that collude, limit the ability for auditors to collect sufficient appropriate evidence

Question #3
Without observing the existence of the sites making the payments, Greenspan could not prove that the contracts for these payments exist
With instances of large amounts of fraud, the customer could collude with the client to make the payments appear as though they were authentic
Greenspan saw these payments on paper but the contracts they were for never existed.
Greenspan would have discovered this if he sent a positive confirmation directly to the client's customers instead of Tom Padgett
Auditors should send external confirmations directly to the clients customers, observe documentation and assets, as well as use other procedures to prove the authenticity of payments and accounts
Question #5
Part 1
The confidentiality agreement did indeed hinder the scope of the audit
Limited E&W's ability to conduct the proper audit procedures to give the correct opinion about the financial statements
Auditing Standards No. 5 C3 defines scope limitations as follows;
The auditor can express an opinion on the company's internal control over financial reporting only if the auditor has been able to apply the procedures necessary in the circumstances. If there are restrictions on the scope of the engagement, the auditor should withdraw from the engagement or disclaim an opinion. A disclaimer of opinion states that the auditor does not express an opinion on the effectiveness of internal control over financial reporting.

Question #5
Part 2
It is the successor auditors responsibility to initiate communications with the predecessor auditor
Question #4
Part 2
Information obtained from the predecessor auditor includes
Integrity of management
Disagreements with management
Communications about fraud and noncompliance with laws and regulations
Communications about significant deficiencies or material weaknesses in internal controls
Predecessors opinion as to the reason for the change in auditors
Question # 4
Part 3
Clients may be worried about critical business information reaching the public or competitors during an auditors visit so the initiate a confidentiality agreement
Auditors must find ways to plan their audit around these confidentiality agreements
In the case of E&W, due to the confidentiality agreement, they were unable to receive the confirmations they needed to give the correct opinion.
Client-imposed scope limitations may affect the opinion when the auditor is unable to collect evidence appropriate & sufficient enough to support an opinion
Auditor may issue a disclaimer of opinion, withdraw from the engagement, or issue an adverse opinion due to the scope limitations - Auditing Standards No. 5 C3
Question #5
Part 3
Question #6
Professional standards do not require auditors to perform procedures when reviewing a clients pre audit report but post year end earnings press release
Clients should let the auditors review the post-year-end press release before releasing it.
It is not required of the client to have the auditor review the press release
In 1989 Minkow was sentenced to 25 years in prison but was released in late 1994 due to good behavior and efforts to improve himself.
In 1995 Minkow served as an associate pastor but soon became the senior pastor two years later
Spokesperson for fraud prevention and detection services
In 2011 Minkow was found guilty of securites fraud committed in 2009 and was sentenced to 5 years in federal prison
Life after ZZZZ Best
**Independence is required for both reviews and year-end audits
Minkow Securities Fraud
Full transcript