boxed items 7/26/00 2:44 PM Page 6 ZZZZ BEST Ba r ry Minkow started operating his carpet-cleaning business out of the Minkow family garage when he was 15. At its peak six years later, the company, called ZZZZ BEST, had a market value of $211 million. On paper, Minkow himself was worth $109 million. Minkow was a celebrity. In Februa r y 1987, he was selected as one of the top 100 young entrep r eneurs in the United States. He spoke of making ZZ Z Z Best the “General Motors” of carpet cleaning. He talked of running for president one because neither the building nor the job existed. day. But, in a press release dated July 3, 1987, ZZZZ Best However, officials of ZZZZ Best managed to get access announced that Minkow had resigned as chief executive to a large office building in Sacramento for a weekend, officer because of a “severe medical problem.” Shortly and Gray was allowed to tour the building to inspect the thereafter, ZZZZ Best filed for Chapter 11 bankruptcy. The “finished work.” On another occasion, ZZZZ Best report- rapid growth of ZZZZ Best had been a fraud, and Barry ed an $8.2 million restoration contract in San Diego. Minkow was eventually sentenced to 25 years in prison. Again, Gray demanded to see the job site. This time he The major aspect of the fraud involved reporting fic- was led through an unfinished building and told that the titious receivables and revenue from fire damage work was still ongoing. Things got very complicated for restoration jobs. For example, ZZZZ Best filed a registra- ZZZZ Best when Gray later requested to see the finished tion statement with the Securities and Exchange Com- job. ZZZZ Best had to spend $1 million to lease the mission (SEC) in 1985 in which it claimed to have a con- building and hire contractors to finish six of the eight tract for a $2.3 million restoration job on an eight-story floors in 10 days. Gray was led on another tour and building in Arroyo Grande, California. Unfort u n a t e l y, wrote a memo saying, “Job looks very good.” Gray has Arroyo Grande, a town of 13,000 people and five traffic subsequently been faulted for looking only at what ZZZZ lights, had no buildings over three stories. On May 19, Best officials chose to show him without making inde- 1987, The Wall Street Journal reported that ZZZZ Best pendent inquiries. had received a $13.8 million restoration contract for a QUESTIONS: Dallas job. Again, the job was nonexistent. With bogus 1. ZZZZ Best grossly inflated its operating results by revenues and receivables like this, ZZZZ Best was able to reporting bogus revenue and receivables. What fac- report net income for the year ended April 30, 1987, of tors prevent a company from continuing to report $5 million on revenue of $50 million, up from $900,000 fraudulent results indefinitely? net income on $4.8 million revenue the year before. 2. What could the auditor have done to uncover the Why didn’t the auditor uncover these irregularities? ZZZZ Best fraud? Larry Gray, the partner in charge of auditing ZZZZ Best, did what he was supposed to do, but in this case he SOURCES: Daniel Akst, “How Whiz-Kid Chief of ZZZZ Best Had, and Lost, It All,” The didn’t do it well enough. When ZZZZ Best reported a $7 Wall Street Journal, July 9, 1987, p. 1. million contract to restore a building in Sacramento, Gray Daniel Akst, “How Barry Minkow Fooled the Auditors,” Forbes, October 2, demanded to see the building. This was diff i c u l t 1989, p. 126..