Barry Minkow's Fraudulent Financial Accounting

Over the years fraudulent financial reporting has increased the concern of the reliability of the US financial reporting practice. It also call into question the roles of auditors, regulators, and analysts in financial reporting. It is well known that frauds affect the fraudsters, auditors, and investors; however it can also affect citizens, industries, and financial markets, while also manipulating both accounting and auditing standards.

The 1980s were plagued by numerous scandals. One of which is Barry Minkow. Barry Minkow, founded his carpet cleaning business, ZZZZ Best in his parent’s garage when he was 16 years old. He grew his business into one of the nation’s largest carpet cleaning and restoration service industries in the 1980s. Within a few years of establishment this venture, ZZZZ Best sustained a prominent station on Wall Street. Unfortunately, the multi-million dollar business’s growth would not be a genuine evaluation of ZZZZ Best true wroth and Minkow would be exposed as the designer of one of America’s most outrageous accounting frauds.

After discovering how tough business was, Minkow resorted to several fraudulent schemes to raise the needed funds to grow his business.

He started with credit card forgeries, insurance fraud, and check kiting, but “soon became even bolder and began reporting fictitious revenues from ‘insurance restoration’ contracts” to coerce banks into approving his loans. He ultimately expanded the insurance restoration activities so much that they accounted for nearly 90% of the company’s annual revenues.

The success let him take the company public in 1986 and “in the three-year period from 1984 to 1987, the company’s net income surged from less than $200,000 to more than $5 million on revenues of $50 million” (Knapp 5th Ed. 119). The company peaked with a market capitalization of $200 million in 1987. As a result, Minkow lived the high life, appearing on Oprah and driving a

Ferrari.
During the five-year span between 1982 and 1987, Minkow maintained financial records embellished with inflated numbers and phony accounts, serving to impress Wall Street investors and stock analysts. However, a look at the numbers would have shown that they were completely unreasonable for a business of ZZZZ Best’s size and for any carpet cleaning business for that matter. For example, ZZZZ Best claimed to serve more insurance projects than the entire US industry supported at the time. The company alleged that some of the renovation accounts cost incredible, irrational amounts, far greater than the cost to entirely construct such structures, let alone merely renovate the sites. In reality, ZZZZ Best was losing millions annually.