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ZZZ Best Company, Inc. fraud

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Baruch College

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  1. Review and audit.
  2. Limitations of the evidence.
  3. Corroborating assertions.
  4. Improper conclusion.
  5. Predecessor-successor.
  6. Confidentiality Agreement.
  7. Press release.
  8. Conclusion.

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. [...]

[...] He did not identify fraud risk factors especially with consideration to key fraud indicators: the number of contracts received by ZZZ Best was greater than the total number available nation wide; a large proportion of ZZZ Best contracts occurred immediately, and opportunistically, prior to a planned offering of stock; the contracts provided payment Barry Minkow (Knapp 121); and, virtually all the contracts were with the same party. The six confirmations gathered by Mr. Greenspan thus would have been a very small sample since they would have all been with one insurance company; this issue would have been an indication to expand the sampling size and a red flag. [...]

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