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ZZZZ Best Carpeting Fraud case

09 Mar 2017Business Essays

Background information

The 1987 ZZZZ Best Carpeting Fraud case involved Barry Minkow and his two business associates. At the age of 16, Barry Minkow initiated the ZZZZ Best Carpeting cleaning business at his parent’s garage (Lieberman). According to investigation report evidence, the company did not make profit and mainly operated on borrowing funds (Wells 16). In a way of engaging loan givers, Barry Minkow opened a fictitious fire and flood damaged buildings restoration business, a company which he listed in the public stock market within a short period. According to the same reports, the stock shares of the restoration business rose from 5cents to $18 per share at an extremely abnormal short duration of time thus accounting for an estimated 80 percent of ZZZZ Best company earnings (Akst).

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However, despite this seemingly booming business, almost all its revenues came from fictitiously recorded receivables (Wells 17). Barry Minkow and his other two associates engaged in protecting their fraud activities by making fake invoices for sales as well as fake customer remittance checks. The production of these phony documents was so skillfully done using photocopying equipments that the company auditors accepted them as evidence that actually sales or receivables transactions occurred in the company (Berman 7). Just to be noted here is the fact that due to failure by auditing companies to identify the fraud activities, the ZZZZ Best Company’s assets reportedly grew to an estimated $240 million within a period of four years (Wells 19). Still, the ZZZZ Best Carpeting Fraud scum was established to have had involved fictitious vendor payments and check kitting practices in and out of three banks (Wells 18).

The company also engaged in over billing carpet cleaning customers through their credit cards (Akst). Nevertheless, it was due to complains of overcharging a Los Angeles housewife carpet cleaning customer that the ZZZZ Best Carpeting Fraud scum came to be unveiled (Lieberman). This incidence led to increased publicity of the company’s unethical behaviors by the media thus prompting law enforcement investigation into the company operations. These investigations led to the arresting, charging and convicting of Barry Minkow and his business associates for engaging in fraudulent activities. Barry was initially sentenced for 25 years but was only served for seven in jail. Consequently, the government was forced to sale ZZZZ Best Company assets to compensate victims of the fraud scum. However, despite the fact that the assets were estimated at $240 million, the sale of the assets only brought to the company an approximated less than $50 thousand in cash (Lieberman).

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Causes

The 1987 ZZZZ Best Carpeting Fraud case was caused mainly by failure of auditing firms to uphold ethical and effective accounting practices (Baliga 8). Investigation into the case established that the company had operated for an estimated five years by using fictitious sales invoice and customer remittance checks as a proof for the company receivables (Baliga 13). According to the underlying principles of accounting, there is a very close interrelation between a company’s financial statements, documented receivables and its actual asset worthy of the company (Berman 11). This correlation was no doubt missing in the ZZZZ Best Carpeting Company but its auditors did not expose it to serve investors from eminent loss of their investment.

Poor banking and loan giving practices should also be blamed for the ZZZZ Best Carpeting Fraud case. Investigation findings into the ZZZZ Best Carpeting Fraud case clearly show that Barry engaged in check kitting in and out of three banks for the purposes of realizing successful loan securing despite the fact that his company did not make profits (Wells 21). Such could only be equated to failure by the banking sector to qualify financial statements of companies, authenticate checks and qualify the actual worthy of a business before giving a loan.

The stocks exchange commissioners, brokers and stocks investment advices can also be seen as a cause for the fraud. How the shares of ZZZZ Best grew in value of a short time remained questionable given the fact that it was never quite commonly known in the public domain. Another cause was quest for prosperity by Barry Minkow in business by all means.

Consequences

The ZZZZ Best Carpeting Fraud case had a number of consequences. The fraud scum brought loss to investors. It has been established that the operations of ZZZZ Best Carpeting cleaning business were initiated through constant borrowings and never made any profits. This thus means that the investment was indeed a financial loss for banks (Lieberman). Still on this, is the fact that Barry Minkow is noted to have been involved in check kitting practices among three banks.

On the side of investors is the loss brought by the company for its fictitious business for restoration of buildings damaged by fire and flood. This is explained by the fact that, despite it being non existent, this business when public and managed to have its shares grow from 5cent to $18 per share. Such a growth gave the ZZZZ Best Company $240 million worth of assets which could only cost less than $50 thousand for compensation of investors (Akst).

Another consequence is the imprisonment of Barry Minkow and his business associates for fraud charges. Following the discovery of the ZZZZ Best carpeting fraud activities, the company was investigated and charges made against its owners, a move which saw Barry Minkow convicted and sentenced for 25 years (Lieberman). Just to be noted here is the fact that the whole ZZZZ Best fraud activities brought financial loss even to carpet cleaning customers as their credit cards were often over billed for services rendered.

Resolutions

Following the revealing of the ZZZZ Best carpet fraud case, the government moved to sell the company assets to compensate investors who lost in the scum (Akst). Still, it has been established that the scum and its associated consequences formed the basis for Barry Minkow to become a saved man. Such also made him become the founder of the Fraud Discovery Institute in San Diego, whose purpose is to educate investors and general public on how to identify and avoid fraud (Lieberman)

Measures which the government should do to prevent cases like this

The government serves the sole purpose of protecting its citizens against social, physical psychological and economic instability. Therefore, to prevent case like the ZZZZ Best carpet fraud case, the government should put in place stiffer rules and regulations to ensure transparency and effectiveness of the auditing practices (Baliga 46). Through this the government will help in sufficiently reducing investor losses caused by inaccuracies of financial statements for companies, a move that could aid in the process of mitigating fraud activities in the society.

Conclusion

It has been established that the ZZZZ Best carpet fraud case acted as an eye opener indicating the weakness of auditing, banking and stock exchange practices of our economy. This is why it calls for the government to investment more resources in enforcing the existing ant-fraud laws as well as enacting and implementing of much effective laws to protect investors from frauds.

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