What was the 'ZZZZ Best'
ZZZZ Best is a bankrupt company that was owned by Barry Minkow in the 1980s. Using forgery and theft, Minkow and his associates appeared to be building a multi-million dollar corporation. ZZZZ Best’s initial public offering (IPO) was in December 1986, and the firm reached a market capitalization of over $200 million before collapsing.
BREAKING DOWN 'ZZZZ Best'
ZZZZ Best began as a carpet cleaning company started by Minkow in his parents' garage when he was in high school, and the business was never profitable. Minkow stole money from many different people over time and created the impression the cleaning business was profitable. A few years later, ZZZZ Best began to specialize in the insurance restoration business.
Factoring in an Appraisal Business
Minkow created a fictitious company, Interstate Appraisal Services, to create documents that fraudulently confirmed ZZZZ Best building refurbishing work for fire and water damage. The appraisal company generated documents to create the appearance that insurance companies hired ZZZZ Best to perform the restoration work. Both investors and bankers developed an interest in ZZZZ Best based on fraudulent financial statements produced by Minkow’s firm.
How Auditors Were Misled
For creation of an IPO, the Securities and Exchange Commission (SEC) requires a firm to compile a prospectus, and that document must include a set of audited financial statements. An independent CPA firm audited ZZZZ Best's financials to provide an opinion as to whether the financial statements were free of material misstatement.
Ernst & Whinney, an independent CPA firm, audited ZZZZ Best's financial statements and relied on the false appraisal documents to perform its audit work because the CPAs believed the paperwork was from an independent third party. When the CPA firm asked to visit a building refurbishing customer site, Minkow and his associates rented a building and created a bogus customer job site.
Example of Other Fraud
Once the ZZZZ Best fraud was discovered, Minkow was convicted of fraud and sentenced to 25 years in prison. During his time in prison, he began to research and uncover other businesses that were doing business fraudulently and informing the federal government. Based on the dollar amount of fraud he eventually uncovered, Minkow’s sentence was reduced to just over seven years. After his release from prison, Minkow became a church pastor and was convicted in 2014 of embezzling $3 million from San Diego Community Bible Church by various means. His theft included stolen donations and an unauthorized church loan.