ZZZ Best Company Inc.
ZZZ Best Company, Inc. is good example for being explored by accounting students regarding audit field. In this case, ZZZ Best Company, Inc., which is established by Barry Minkow, became a tool for its owner i. E. Barry Minkow to get money by lying to thrid parties via fictitious insurance restoration project. Difficulties in developing carpet cleaning industry made Barry Minkow think to get money in wrong way. Collaborate with Tom Padgett and also extensive social network, made this big scheme to deceive big investors became easy.
After success in cheating investors, Barry Minkow think bigger to make more money. He think to make ZZZ Best Company go public. For company which want to go public, it must fulfill many requirements of SEC. One of requirements is audited by accounting public officer. To fulfill that requirement, ZZZ Best Company Inc. hired George Greenspan to perform audit for 12 months. According to his testimony regarding ZZZ Best scandal to congressional subcommittee that investigated fraud in ZZZ Best Company, Inc., Greenspan insisted that he has proprtly audited Minkow’s company although finally Greenspan admitted that he had not inspected any of the insurance restoration sites.
Next audit company which audited Minkow’s company was Ernst and Whinney. From Greenspan confession, he already communicate with Ernst and Whinney as predecessor auditor who audited ZZZ Best but this statement was rejected by Ernst and Whinney. Ernst and Whinney signed an enagement letter as a proof that Ernst and Whinney had right to audit ZZZ Best Company Inc. In that contratc, ZZZ Best Company Inc., asked four services to Ernst and Whinney that the audit firm intended to provide ZZZ Best, that are: review’s company financial statement for three months period, assistance in the preparation of a registration statement to be filled with SEC, a comfort letter to be submitted to ZZZ Best;s underwriters, and a full scope audit for fiscal year ending April, 30 1987. In process, finally Ernst and Whinney not fulfilled the all services required by ZZZ Best because Ernst and Whinney experienced a series of events that caused the firm to question Barry Minkow’s integrity.
done something terrible and made deception to get much money from potential investors for his own. The newspaper article triggered a chain of events that caused ZZZZ Best to collapse and disappear less than three months later. First, a small brokerage firm specializing in newly registered companies with suspicious earnings histories began short-selling ZZZZ Best stock, forcing the stock's price into a tailspin. Second, Ernst & Whinney, ZZZZ Best's law firm,and ZZZZ Best's investment banker began giving more credence to the allegations and rumors of financial wrongdoing by Minkow and his associates. Third, and most important, the article panicked Minkow and compelled him to make several daring moves that cost him even more credibility. The most critical mistake was his issuance of the May 28, 1987, press release that boldly reported record profits and revenues for his firm.
ANSWER
1. Ernst & Whinney never issued an audit opinion on financial statements of ZZZZ Best but did issue a review report on the
company’s quarterly statements for the three months ended July 31, 1986. How does a review differ from an audit, particularly in terms of the level of assurance implied by the auditor’s report?
Answer: A review report does not assess the control risk of a
company, which means Ernst & Whinney could have not gotten the proper risk that a material misstatement could occur within a
relevant assertion. The report could have pointed out problems in the financial statements but it would not give the audit teams assurance of their accuracy. Ernst & Whinney never investigated ZZZZ Best’s internal control either, if they had done so they may have caught onto some of the fraudulent acts that were being committed. The main difference between an audit opinion and a review is an audit opinion provides assurance on the financial statements that they are accurate.
2. SAS No. 106, “Audit Evidence,” indentifies the principal “management assertions” that underlie a set of financial
statements. The occurrence assertion was particularly critical for ZZZZ Best’s insurance restoration contracts. ZZZZ Best’s auditors obtained third-party confirmations to support contracts, reviewed available documentation, performed analytical procedures to evaluate the reasonableness of the revenues recorded on the contracts, and visited selected restoration sites. Comment on the limitations of the evidence that these procedures provide with regard to the management assertion of occurrence.
it was just a building he had bought for the sole purpose of duping the auditors. As for analytical procedures performed, this can be a problem at times because sometimes there is a lack of
comparability among companies and there can also be an inability to obtain current industry data.
3. In testimony before Congress, George Greenspan reported that one means he used to audit the insurance restoration contracts was to verify that his client actually received payment on those jobs. How can such apparently reliable evidence lead an auditor to an
improper conclusion?
Answer: The verification that the client was actually receiving payment on certain jobs was just simply providing Greenspan with the evidence about the assertion of the payments. However this method does not necessarily show the completeness and valuation of the payments. The client could have been receiving payments but they may have not been made in full, not on time, and in some cases the payments could not have been made at all. If this information was known this could have lead the audit team to believe that something was not right and things were not as how Minkow did perceive them to be.
4. What is the purpose of predecessor-successor auditor communications? Which party, the predecessor or successor auditor, has the responsibility for initiating these communications? Briefly summarize the information that a successor auditor should obtain from the predecessor auditor.
acceptance cannot be final until the communications have been evaluated. Matters subject to inquiry should include:
Information that might bear on the integrity of regarding fraud and illegal acts by clients.
Communications to management and those charged with governance regarding significant deficiencies and material weaknesses in internal control.
The predecessor auditor's understanding as to the reasons for the change of auditors.
5. Did the confidentiality agreement that Minkow required Ernst & Whinney to sign improperly limit the scope of the ZZZZ Best audit? Why or why not? Discuss general circumstances under which confidentiality concerns on the part of a client may properly affect audit planning decisions. At what point do client imposed audit scope limitations affect the type of audit opinion issued?
Answer : Of course that confidentiality agreement limited the scope of ZZZ Best audit. The agreement prevent Ernst & Whinney to get required evidence regarding audit of ZZZ Best. In the agreement also stated that Ernst & Whinney would not make any follow- up telephone calls to any contractors, insurance companies, the building owner, or other individuals involved in the restoration contract. This restriction effectively precluded the auditors from corroborating the insurance restoration contracts with independent third parties. The auditor should ordinarily disclaim an opinion when the client imposes a significant scope limitation on the auditor because audit risk is raised to an unacceptably high level. In this case the example is when Ernst & Whinney prohibited to corroborate the insurance restiriction contracts to independent parties. When client start to protect too much of its company confidentiality that makes auditor difficult to get evidence to supported the opinion later, that protection will be seen as preventing something bad in company.
