Barry Minkow precociously committed fraud at the age of 16 by forging credit card signatures. As an adult he was resolute in defrauding investors of ZZZ Best Company, Inc. through inventive hoaxes involving insurance restoration projects. ZZZ Best Company, Inc. was essentially in the business of fraud.
Investors relying upon Ernst & Whinney's review report of the company's quarterly statements would not have the same level of assurance as an audit. The difference in assurance arises because of the objectives are different. The objective of a review is "to provide the accountant with a basis for communicating whether he or she is aware of any material modifications that should be made to the interim financial information for it to conform with generally accepted accounting principles" (SAS 100). The objective of an audit according to SAS No. 100 "is to enable auditors to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework".
[...] Gray did not seek confirmation with the building's owner for proof of an insurance claim, judging that the internal paperwork of ZZZ Best was competent evidential matter. The auditor's judgment can negatively affect the evidence gathered: auditor may find it necessary to rely on audit evidence that is persuasive rather than conclusive” (SAS 106). This aspect of the limitation can be seen in the case when insurance claims adjuster, and later co-conspirator, Tom Padgett confirmed the insurance contracts won by ZZZ Best. [...]
[...] Professional skepticism was compromised by Ernst & Whinney with respect to the confidentiality clause when the company could not seek confirmation through third parties that the restoration sites existed and ZZZ Best had rights to the contracts. Confirmation through insurance companies, the building owner and other individuals would have revealed the fraud. The scope of the audit was limited to evidential matter manufactured by management. Analytical procedures would effectively fail to detect misstatements because of the evidential matter. Substantive testing for management's assertions would be utterly ineffective because of the lack of reliability of the evidence. [...]
[...] Nonetheless, the auditor should not be publicly associated with the press release.” With respect to the ZZZ Best fraud case study, the company issued a press release, without notifying Ernst & Whinney, of record profits. When Ernst & Whinney discovered evidence confirming the fraud allegation made by a third party, the accounting firm waited 30 days to inform the SEC of the change in auditors. The SEC since has changed the time period from 30 days to 15 days. Conclusion The accounting fraud committed by ZZZ Best founder Barry Minkow was a combination of creative use of personnel by Barry Minkow and a deviation from auditing principles by the auditors. [...]
[...] The accounting environment in which the ZZZ Best Company, Inc. fraud occurred must be taken into consideration in order to assess the difference in the implied assurance between a review and an auditor's review. Prior to the Sarbanes-Oxley Act of 2002, auditing firms were able to provide consulting services with audit functions. In addition, “GAAP became viewed as a set of rules that could be interpreted (with very minor boundaries) to suit the reporting objectives of management” (Johnstone 4). A review, within the context of the time period and the fraud, would be far more susceptible to management influence since the review is concerned primarily with conformity with GAAP rules and pronouncements. [...]
[...] He confirmed that ZZZ Best had received payment to the contracts, but he never confirmed that the sites existed. ZZZ Best did not have any contracts as was stated in the case study, but created elaborate and fictitious restoration sites. Predecessor-successor The purpose of predecessor-successor auditor communication is to “provide information that will assist the successor auditor in determining whether to accept the engagement” (SAS 84). This communication would be a method to ascertain the audit risk of the client. [...]
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