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The Business and Accounting Advisor

Business survivability in this economy is difficult at best. This blog will offer useful business and accounting advise and ideas for ongoing business and competitive advantage.

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Do Companies Really Learn?

July 3rd, 2012 at Tue, 3rd, 2012 at 2:22 am by glennsmith

This is an interesting question and I believe we can learn the answer from one particular fraud case ZZZZ Best and Barry Minkow. Barry committed fraud 20 – 30 years ago. He went to jail for 7 years came out and made a fortune from catching fraud. Did he learn his lesson? His current residence is the federal prison system. I guess we have the answer to your question. Business is about making money and greedy business leaders will do so at the cost of whatever it takes. Hopefully there are other business leaders out there we can learn from.

 

Introduction to the ZZZZ Best Fraud Case and Barry Minkow:

ZZZZ Best is an accounting cases instructors use the most to teach aspiring accountants the importance of forensic accounting and fraud investigation. Barry Minkow started ZZZZ Best in his sophomore year in high-school in his parent’s garage with four phone lines and three employees. Unfortunately, business pressures, unpaid bills, and inadequate age to run a business created a shift in Minkow from a young entrepreneur to a young fraud perpetrator. People have a lack of desire to see fraud in young entrepreneurs. Stice, Albrecht, and Brown (1991) argue that during this fraudulent activity very few saw or wanted to see that the company ZZZZ Best was in trouble but study of this case can help both management and accountants prevent future fraud.

Within five years of starting operation Barry Minkow with the help of Tom Padgett turned ZZZZ Best Carpet Cleaning Company to ZZZZ Best building restoration shell-company. The reason it was a shell company is Minkow and his employees never performed any building restorations. Minkow rented a downtown office building, paid security guards $50 to recognize them as they walked in and built a virtual Hollywood set to fool auditors inspections. He also borrowed letterhead and forged signatures. Minkow built the entire building restoration business on a farce.

Barry Minkow became one of the youngest business success stories from a company he started at the age of 13. Within five years he took ZZZZ Best public. Minkow built ZZZZ Best on lies. By the age of 20 Minkow was in court on fraud charges. Minkow received a sentence of 25 years in federal prison for fraud. Understanding Barry Minkow is important to develop an understanding of why fraud took place (Wells 2001).

Unfortunately, like many crimes perpetrators the fraud triangle was not broken in his life. In 2001 Minkow once again returned to crime committing fraud. Whelan (2011) argued that this last guilty plea was Mr. Minkows latest fall in an up and down financial career.

 

The nature and extent of the ZZZZ fraud case

The nature and extent of the ZZZZ fraud case includes check kiting, loan fraud, bribery, and fictitious record keeping. Trusts taken advantage of in this case include shareholders, accountants, and investment bankers. Additionally elements involved in the environment of this case include phone loan files, phony check registers, phony general journals, and phony accounts receivable invoices. Naff (1994) argues the ZZZZ Best fraud case raised and spent about $50 million with between $100 and $150 million traded on the stockmarket.

Understanding ZZZZ Best and its chief perpetrator Mr. Minkow assists future stakeholders understandings. Fraud of this nature is not a one-time occurrence. Steinberg (2011) argues Minkow and other cases, such as this demonstrate the reason investors should hold upper-level management to a higher integrity level.

 

The organization and environment surrounding the ZZZZ Best fraud case.

The environment surrounding the ZZZZ Best case was one of youth entrepreneurship. Gite (1990) argued that young entrepreneurs are increasing rapidly, and the world is looking at these children as if they are the heroes of the hour. At the time of ZZZZ Best this was true. This has not seen any decrease. Investor expectations placed extreme pressure on Minkow to perform.

Kanberg (1995) argues that the environment surrounding the ZZZZ Best was perfect for young genius Barry Minkow to generating publicity and instill confidence in investors. Minkow was a young man with a dream of financial and entrepreneurial success. Dorminey, Fleming, Kranacher, and Riley (2010) argued money, ego, and entitlement were three contributing factors to the ZZZZ Best fraud perpetration.

These and many other factors surrounded the ZZZZ Best fraud case. Minkow must have had his ego boosted when auditors allowed ingratiation to stir their decisions. Robertson (2010) argued auditors results vary because of factors, such as ingratiation. Ingratiation may feed ego and ego may have factored into the fraud case.

An examination of the fraud triangle links the three elements existed as the building block of this fraud. Kranacher, Riley, Jr. and Wells (2011) argued the fraud triangle includes perceived opportunity, rationalization, and perceived pressure. Minkow faced overwhelming pressure, opportunity, and rationalized his youth.

ZZZZ Best was heralded on tv and Radio including shows such as Oprah as the young star. This pressure to perform was overwhelming. The same pressure exists in the ministry. Many people look at the ministry as a place where failure is taboo. Osborne Jr (1987) argued most failures are never heard about. ZZZZ Best and Minkow was not only heard about but a topic of conversation from the day he opened a successful business. Minkow rationalized the white-collar crime he committed by believing it was up to him to rescue his failing business. Zeff (2003) argued Minkow embarrassed the accounting professionals of his day. The embarrassment included Ernst and Young or Earnst and Whinny as the company was called in the 80’s. Many regulators of banking and finance practice the same sort of deception. If they are doing it, the rational following might seem to ask, why everyone else should not attempt this deception. Minkow fell susceptible to this rationale. The opportunity to use the press granted by success of youth was the third and closing argument in the environmental case to commit fraud.

 

The fraud methodologies used to carry out the ZZZZ Best Fraud Case.

Minkow employed numerous methodologies and elements to perpetrate this fraud. These included accounts receivable fraud, check kiting, loan fraud, bribery, fictitious record keeping, broken trusts, phone loan files, phony check registers, and phony general journals. Perhaps the worst of these was the embezzlement of millions of dollars for fancy sport cars and high living.

Minkow admits after his jail period and although he fought against fraud that accounts receivable fraud was to his benefit because it increases profits while explaining an absence of cash.  Wells (2001) argued that CPA’s need to understand both the method and motivations of fraudulent chief executives. Understanding Accounts Receivable is important in the Minkow case. When perpetrators make purposeful attempts to book income not expected to occur, they commit fraud. Wells argued perpetrators cannot commit financial statement fraud by accident.

Check kiting was one type of fraud perpetrated in the ZZZZ Best case. Reilly (2003) argued check kiting exists when a bank customer take advantage of check collection systems through timing deposits and withdrawals. Banks that allow payments on uncollected funds run the risk of perpetrators of check kiting frauds. Frauds perpetrated in the ZZZZ Best case included check kiting. Pressly (1996) argued Minkow paid for his check kiting schemes with stolen jewelry from his grandmother and staging phony break-ins to create false insurance fraud claims. These were only the beginning of the fraud involved in this case. Through broken promises, phony loan files, fictitious record keeping, and running a shell company Minkow stole millions from investors.

 

Internal controls violated in the case.

Examining the success of internal controls to perform as expected is a major responsibilities of auditors. The auditors failed dismally in the ZZZZ Best fraud case. Enofe (2010) argued the definition of internal control is the process management places in the company to safeguard assets from theft, misappropriation, and abuse. That the chief executive officer of this ZZZZ Best case was the chief perpetrator included his overlooking the internal controls. These controls at times were simply ignored.

A thorough audit of all ZZZZ Best company operations would have disclosed the fraudulent activity taking place. Barry Minkow was a mastermind manipulator and double dealer. He was successfully able to redirect auditor attention. Minkow kept auditors attention on the legitimate side of the business while redirecting their attention away from the fraudulent building restoration scheme. Minkow admitted to going as far as getting to know the auditors spouses to enable the blackmailing of the spouses into granting positive audits. The financial statements contained errors that auditors would catch under a diligent audit (S 2010).

The questions abound of what the auditor missed in the ZZZZ Best case. Zeune (1996) argued auditors must examine and assess management responsibility, ability, pressure, style, and attitude regarding internal controls. Professionals simply ignored many internal controls. These included falsified general journal entries, undocumented records, and falsely documented sales to non-existent customers.

The auditors for the ZZZZ Best case that signed off on the audit were found not liable for their part of this fraud. Without their help this fraud may not have happened. Sohr, Lifson, Manisero, and Rosario (2009) argue that in similar cases CPA’s risk liability exposure. The one thing that saved ZZZZ Best from further damage from reliance by third parties was the refusal of the organization to issue a clean audit statement.  Baliga (1991) argued that ZZZZ Best only received a review letter from Ernst and Young not an audit report.

 

Violations of tax, regulatory, and corporate law. Nature and consequences of the violations.

The corporate law violations that took place with ZZZZ Best are numerous. Blanchini (1997) explains that material misrepresentation like that found in the ZZZZ Best case are important because a clear distinction of responsibility is set up. Determinations of parties’ guilt can include accountants, lawyers, and even management, and even congress (Turner 2006).

The courts convicted Barry Minkow on 54 counts, including racketeering, securities fraud, laundering money, embezzlement, mail fraud, tax evasion, and bank fraud. When an individual choose to invest money into a business the investor is placing trust in the management and executives of the company to act honestly and in their best interest. This does not always happen and opens the door to various crimes, including embezzlement. Pressman (1998) argued this is exactly what occurred in the case of Barry Minkow. Minkow took the investors money and instead of putting it to work in the business spent it on sports cars, women, and partying.

The consequences of this case are severe. First, because this paper is written for the benefit of Ernst and Young it is important to note that this case damaged both the credibility and reliability of Ernst and Young. The company was fortunate to have issued a review instead of a positive audit. Ernst and Young escaped serious repercussions had the auditors granted a positive audit letter. There were things missed that auditors should have identified.  Ernst and Young must correct these mistakes in future audits. The SEC enacted Sarbanes Oxley laws to benefit the investors in companies but this does not remove the requirement for auditors to practice due diligence.

Mr. Minkow received sentencing on 57 criminal counts and a prison term of 25 years. In the end Minkow served seven before parole. He then went to work on behalf of the investors catching other fraud cases. His actions are questionable as he returned to prison and resides there today. He was not the only person sentenced to prison for the ZZZZ Best case. Akst (1987) argued four other defendants received legal punishment including Thomas Padgett who received payment from Minkow for restoration jobs that never happened and Mark Morze. Morze aided Minkow in committing these crimes. In total the courts charged eleven individuals with wrong doing in this case.

Barry Minkow was charged with and convicted for tax fraud. Wells (1993) argued when Minkow needed to pay investors he went to the bank with fake tax returns and fake financial statements to gain bank loans. The bankers did not verify the facts of the tax returns. This opened the door for the fraud to continue.

 

Fraud participants.

The participants in the ZZZZ Best Fraud case include both primary and secondary parties. The primary parties include Barry Minkow and his partner Mark Morze, in ZZZZ Best. The secondary parties to this fraud case include accountants, lawyers, and bankers. Backer (2003) argues each of these parties have a responsibility to the public to provide investor protection.  Ernst and Young were found not liable for actions in this case but involvement occurred and items were missed.

The courts charged eleven other participants with crimes involved in this massive ponzi scheme. (Dingle 1988) argued cases, such as ZZZZ Best, demonstrates that the accounting audit community cannot afford to tolerate failure to meet the public’s expectations in regard to audits. The audit team after discovering the ZZZZ Best fraud resigned without telling anyone about the ongoing fraud.

Bankers should have verified tax returns and financial statements before approving high-risk loans for Minkow. Bankers could have but did not verify facts behind faked tax returns and financial papers. Wells (1993) argued these faked documents were part of the fraud perpetration. With credit stretched to the limit banks still granted him loans. Wells continued to argue that Minkow played on the competitive nature of the accounting business by telling the (independent) auditors he could always go to another accounting company to get the work needed completed.

 

The investigative, regulatory or audit participants and the role they played in the fraud or subsequent investigations.

Accounting faculty used the ZZZZ Best case to instruct courses in forensic accounting for the last two decades. Scholars termed this the fraud of the century. Regulatory rules, procedures, and laws, such as the Sarbanes Oxley Act, have resulted from this case and others. Siegel, Franz, and O’Shaughnessy (2010) argued cases, such as ESM Government Securities, and ZZZZ Best, resulted in congressional hearings on the accounting profession. The American Institute of Certified Public Acountants, the Institute of Management Accountants, the Institute of Internal Auditors, the Financial Executive Institute, and the American Accounting Association examined fraudulent reporting citing the ZZZZ Best case among others.

Minkow himself faulted the auditors, bankers, lawyers, and investors in this case. These parties were too trusting. There is some validity in caveat emptor. The saying fool me once shame on you, fool me twice shame on me become relevant with Minkows latest criminal activity. Wells (1993) argued the fraud was not discovered by auditors, bankers or lawyers but by a diligent housewife defrauded of money. Auditors, audit firms, and audit firm management need to develop procedures to ensure investor protection so they are the first to find fraud not the last left holding the bag.

 

Board of directors actions that could have made a difference. Subsequent actions that could take place to prevent similar occurrence.

When the CEO of a company as small as ZZZZ Best turns to fraud it is difficult to for the board of directors to stop the fraud. Ernst and Young at the time could have performed better audits and certainly could have informed officials of suspected fraud. Instead Ernst and Young simply walked away from ZZZZ Best without reporting anything. Over the last two decades the accounting instructors use the ZZZZ Best case heavily in accounting classes and schools to demonstrate changes in the profession to prevent similar occurrence. Wells (2004) argued the public is crying out for changes in investor safety.

One things Ernst and Young needs to do is invest in the quality of audits. Wells (2004) argues Ernst and Young must examine past and current forensic accounting practices and critical thinking exercises. Many experts believe internal control can prevent fraud. Wells argued this is fiction. Fraud still occurs even in the best internal control environments. Internal controls can play a vital role in deterrence but management and investors need to consider these as deterrents not guarantees against fraud.  Wells offers a partial list of factors affecting occupational fraud. Simply going by this list certain items avail themselves to deterring fraud. These include possessing and maintaining a dedication toward better internal controls, having, and maintaining an organizational desire for integrity, and commitment to an organizational value system. The ZZZZ Best case demonstrates how the pressure to show and maintain a profit risks the temptation of fraudulent reporting. Ensuring maximizing shareholder wealth is not the only priority is useful to deterring fraud. Swiftness and severity of fraud punishment assists organizations in deterring fraud.  Maintaining a sensitivity to negative peer pressure for Ernst and Young’s top directors to the lowest employees can assist in better performance of audits. Reward systems for ethical behavior can help any organization and ensuring proper organizational culture and dynamics is essential.

Audit firms cannot prevent fraud completely, even though the public expects auditor firms to do so. Adopting a more holistic approach to fraud deterrence is a healthy start toward better organizational performance. Maintaining a list of best practices assists in fraud deterrence. Ernst and Young should not wait until the answers are achieved. Instead beginning and maintaining these practices will enable the organization to meet the requirements of the organizational stakeholders. Fraud may not be entirely preventable but better procedures will ensure improved performance in the conduct of audits and public confidence will grow (Wells, 2004).


 

 

Reference:

 

Akst, D. (1987). Suit by ZZZZ Best Accuses Founder, 4 Others of Fraud. Wall Street Journal. New York, N.Y., United States, New York, N.Y.: 1-1.

ZZZZ Best investors filed a civil court suit against Barry Minkow. Minkow resigned as the board of directors chairman when he was 21 years of age. The suit charged Mr. Minkow anf our others of criminal activity. This suit alleged Minkow cost the company more than $25 million. This report identifies Mark Morze as the co-conspirator of the ZZZZ Best fraud case. Akst argued 4 other defendants received legal punishment including Thomas Padgett who received payment from Minkow for restoration jobs that never happened and Mark Morze. This paper uses this reference to identify the co-conspirators for this case.

 

Backer, L. C. (2003). “The Duty to Monitor Emerging Obligations of Outside Lawyers and Auditors to Detect and Report Corporate Wrongdoing Beyond the Federal Securities Laws.” St. John’s Law Review 77(4): 919-1018.

The ZZZZ Best case is about investor protection. The public was violated by the ZZZZ Best management team and let down by auditors, bankers, and management. The SEC has enacted many new duties for parties involved in the investment trade of public securities. Backer’s article discusses these emerging obligation and this report uses these facts to detail what parties should do differently form the parties associated with the ZZZZ Best case. Backer argues parties have an active role in investor protection rather than a passive role.

 

Baliga, W. J. (1991). “California Supreme Court Vacates Union Bank Case.” Journal of Accountancy 172(2): 25-25.

This article reports on the ruling by the California Supreme Court in regards to Union Bank v. Ernst & Whinney (aka Ernst & Young). The appellate cour ruled Ernst was not liable for $7 million in credit to ZZZZ Best Company for reliance on the audit review performed by Ernst & Whinney. Baliga (1991) argued that ZZZZ Best only received a review letter from Ernst and Young not an audit report.

 

Blanchini, P. (1997). “The statement someone else makes may be your own: Primary liability under section 10(b) after Central Bank.” St. John’s Law Review 71(4): 767-793.

Blanchini reports on the Central Bank of Denver v First Interstate Bank of Denver (1994) case. The US Supreme Court ruled private plantiffs may not maintain aiding and abetting suits under section 10(b) of the federal securities laws. Investor protection plays a pivital role in the ZZZZ Best case. Under this provision primary actions are not the responsibility of secondary actors. This report uses Blanchini’s article to demonstrte where seconary actors made mistakes that allowed the ZZZZ Best case and Minkow’s Perpetration of the crime.

 

Dingle (1988). “Hearings Focus on ZZZZ Best.” Journal of Accountancy 165(4): 80-80.

Dorminey, J. W., A. S. Fleming, et al. (2010). “Beyond the Fraud Triangle. (cover story).” CPA Journal 80(7): 16-23.

This article introduce the fraud triangle and the environmental factors necessary for fraud perpetration. The characteristics that created the ZZZZ Best fraud are examined. This paper uses this article to introduce money, ego, and entitlement as three factors causing Barry Minkow to enact fraud.

 

Ernst and Young (1991). “Ernst & Young Not Liable In ZZZZ Best Case.” Journal of Accountancy 172(1): 22-22.

Ernst and Young was found not liable for the audit report used in the lending decision to extend $7 million to ZZZZ Best Co. The article presents a court case between Union Bank of California and Ernst & Young. An appellate court in California found Earnst and Young not liable to Uniion Bank of California even though the bank relied on the auditors report to extend a loan to ZZZZ Best. Provessionals involved with ZZZZ Best included Ernst. California case law states independent auditors owe a duty of care to reasonably foreseeable plantifs who rely on the reports they produce. This report uses this article to posit the question of the responsibility Ernst and Young play in the ZZZZ Best case.

 

Gite, L. (1990). “These kids mean business.” Black Enterprise 21(5): 48.

Gite explores the growing number of ‘kidpreneurs.’ ‘Kidpreneurs’ are pre-adult business owners who started and operated businesses before they turned 18. Gite provides suggestions to parents to help these young entrepreneurs. Gite argued that young entrepreneurs are increasing rapidly and the world is looking at this kids as if they are the heroes of the hour. This paper uses this article to demonstrate one environmental variable playing a signficant role in this fraud case.

 

 

Kanberg, J. H. (1995). “When professionals become victims.” International Commercial Litigation: 18-18.

Many authors including Kanbert agrue the public assumption is bankers, lawyers, and accountants owe a duty of diligence of protection against the risk of fraud. One byproduct of this assumption is the considerable lawsuits that follow fraud cases including ZZZZ Best. Many accounting and auditing instructors use the ZZZZ Best case as a case study. The vulnerability of those assumed to be owed a duty of protection makes this fraud case an excellent source of information. The unfortunate lessons is how little attorneys, accountants, and bankers can do to protect themselves from liability. This paper uses this article to examine the environment allowing the perpetration of the ZZZZ Best fraud.

 

Kranacher, M.-J., J. R. A. Riley, et al. (2011). Forensic Accounting and Fraud Examination. Danvers, MA, John Wiley & Sons, Inc.

Kullberg, D. (1988). “Commentary on The Profession.” Accounting Horizons 2(3): 108-109.

Kullberg reported in this article the 8-K public filing triggered by the resignation of auditors without completing the public audit. While the audit party was eventually found not guilty of particpation in this fraud scheme duties of due diligence were missed. This report uses the Kullberg article to demonstrate good and bad results from actions taken by Earnst and Young.

 

Naff, K. C. (1994). “Z scam of Z century: An interview with ZZZZ Best’s Mark Morze.” Business Credit 96(9): 33-33.

Mark Morze and Barry MInkow perpetrated the ZZZZ Best Carpet Cleaning fraud. In this fraud they obtained between 100 and 150 million dollars. May auditors, lawyers and investment bankers acted severly negligently in this case. This negligence could have cost them dearly including but not limited to jail terms and fines. This paper uses Naff’s article to introduce the ZZZZ Best case.

 

Osborne Jr, A. E. (1987). “Understanding Entrepreneurship.” Business Forum 12(4): 12.

Osborne Jr. explores entrepreneurship and itss process in the U.S. Osborne Jr. argued most failures are never heard about.

 

Pressly, T. R. (1996). “Recent publications.” Ohio CPA Journal 55(4): 60.

Reviews the book `Clean Sweep,’ by Barry Minkow.

 

Pressman, S. (1998). “On Financial Frauds and Their Causes: Investor Overconfidence.” American Journal of Economics & Sociology 57(4): 405-421.

Pressly argued Minkow paid for his check kiting schemes with stolen jewelry from his grandmother and staging phony break-ins to create false insurance fraud claims. This paper uses this article to examine the methodologies used in this fraud case. \

 

Robertson, J. C. (2010). “The Effects of Ingratiation and Client Incentive on Auditor Judgment.” Behavioral Research in Accounting 22(2): 69-86.

Evidence from practice demonstrates auditors can be ingratiated by strategic and tactical inducements. These inducements can facilitate persuasion of auditors with less than 100 percent integrity. Robertson argues ingratiation appears to magnifty client incentive on auditor judgment. Auditors faced with ingratiating clientelle may comply with client requests that are not completely ethical. This paper uses this article to demonstrate that ingratiation played a part as a strong factor in the ZZZZ Best audit case.

 

S, J. (2010). “Now You Don’t See It.” CFO 26(2): 17-17.

Distraction and deception played important part of the perpetration of the ZZZZ Best fraud. Auditors were purposely distracted away from errant financial statements. This paper uses this article to examine internal controls that failed to deter the ZZZZ Best audit.

 

Siegel, P. H., D. P. Franz, et al. (2010). “The Sarbanes-Oxley Act: A Cost-Benefit Analysis Using The U.S. Banking Industry.” Journal of Applied Business Research 26(1): 73-83.

Sarbanes-Oxley effected the american banking and accounting industries in many ways. Cases such as ESM Government Securities, and ZZZZ Best resulted in congressional hearings on the accounting profession and changes in laws including the Sarbanes-Oxley Act. This paper uses this article to examine investigations taking place because of the ZZZZ Best fraud case.

 

Stice, J. D., W. S. Albrecht, et al. (1991). “Lessons to Be Learned – ZZZZ Best, Regina, and Lincoln Savings.” The CPA Journal 61(4): 52-52.

The ZZZZ Carpet Cleaning Company fraud case is a text book accounting fraud case used in many accounting schools and university programs. Many lessons can be learned from the study of this case including the importance of accountants exercising better diligence and more care in the future. Frauds cannot be completely eliminated but through proper internal controls and audit exercises they can be decreased. This article introduces the ZZZZ Best case including lessons to be learned for the accounting profession. This paper uses this article to introduce both the case and the problems associated with it.

 

Turner, L. E. (2006). “Learning from Accounting History: Will We Get It Right This Time?” Issues in Accounting Education 21(4): 383-407.

Many parties played important roles in the perpetration of this fraud. Parties involved included accountants, lawyers, and most directly company management. The United States has faced economic turmoil because of fraud perpetration and investor mistrust of publicly traded securities. This article posits the theory that the accounting profession should work toward better regulation for investor protection. This paper uses this article to demonstrate parties guilt in the ZZZZ Best scenario.

 

Wells, J. T. (1993). “Financial frankensteins.” The Internal Auditor 50(2): 52-52.

Newer and tougher standards help auditors reduce financial fraud such as ZZZZ Best. Wells identifies significant frauds and their effect on accounting procedures developed in the 90′s and 2000′s. Wells argued the fraud was not discovered by auditors, bankers or lawyers but by a diligent housewife defrauded of money. This paper uses this article to demonstrate the failed audit particpants in this case.

 

Wells, J. T. (2001). “Follow fraud to the likely perp.” Journal of Accountancy 191(3): 91-94.

This article argues financial statement fraud cannot be accidental. The authors posit someone must have trickery in mind in these situations. Barry Minkow was found guilty of that financial trickery. This paper uses this article to introduce Barry Minkow and directly trace the perpetration of this fraud back to Mr. Minkow.

 

Wells, J. T. (2004). “New Approaches to Fraud Deterrence.” Journal of Accountancy 197(2): 72-76.

The public is crying out for greater integrity in public investment. Certified public accountants owe a duty of due diligence to third parties relying on information they release about companies trading publicly. This article argues increasing penalties has not deterred or prevented crime. Internal controls have also proven inadequate for fraud prevention. Although the United States has some of the harshest penalties toward white collar crime the United States also has one of the highest rates of white collar crime. Auditors are tempted to avoid the responsibilty of fraud detection because they become liable for crime they had little or no opportunity to detect. This paper uses this article to illustrate changes occuring in the prevention and deterrance of fraud.

 

Whelan, R. (2011). Global Finance: U.S. Charges Fraud Sleuth in Fraud — Barry Minkow Faces Up to Five Years in Lennar Stock Case; Guilty Plea Planned. Wall Street Journal. New York, N.Y., United States, New York, N.Y.: C.3-C.3.

Barry Minkow, the perpetrator of the ZZZZ Best fraud case is back in prison on fraud charges. This article discusses the current fraud case and the chief conspiritor Nicolas Marsch. This paper uses this article to introduce the latest fraud perpetrated by Mr. Minkow.

 

Zeff, S. A. (2003). “How the U.S. Accounting Profession Got Where It Is Today: Part II.” Accounting Horizons 17(4): 267-286.

This article discusses the historical development of the U.S. Accounting profession. The Securities Exchange Commission attitude toward audit firms has changed over the last few decades of the 20th century. Bank failures during the 80′s raised troubling concerns.. Auditor independence theory is examined in this article. This paper uses the article by Zeff to posit the question of why the audit firm was embarrassed by Minkow when they missed very clear signs of fraud.

 

Zeune, G. D. (1996). “Auditors will be required to detect fraud.” Business Credit 98(8): 16.

The American Institute of Certified Public Accountants require auditors to detect material fraud. Auditors are expected to understand and examie fraud and financial statement material mistatements. Auditors must examine and assess management responsibility, ability, pressure, style, and attitude regarding internal controls. This paper uses this article to examine why many of the internal control violatinos were missed by auditors in the ZZZZ Best fraud case.

 

 

 

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