Academic journal article Journal of Accountancy

Ernst & Young Not Liable in ZZZZ Best Case

Academic journal article Journal of Accountancy

Ernst & Young Not Liable in ZZZZ Best Case

Article excerpt

A California appellate court ruled Ernst & Young was not liable to Union Bank of California, which allegedly relied on Ernst's review report in extending $7 million to ZZZZ Best Co. Z Best, a California company, failed in 1986 after authorities discovered a massive fraud involving fictitious customers of its carpet cleaning business and bogus revenue and income reports. Z Best's founder, Barry Minkow, subsequently was convicted of a variety of criminal charges in connection with Z Best's operations and is now serving a long prison term.

Ernst reviewed Z Best's financial statements for the three months ending July 31, 1986. A draft copy of this review report was contained in a preliminary prospectus for a $100 million stock offering by Z Best. Union alleged it extended credit to Z Best based on the preliminary prospectus, oral representation by Ernst that Z Best was growing and the reputation of the professionals involved with Z Best, including Ernst.

The court, in ruling for defendant Ernst, cited several deficiencies in Union's case:

1. Claims by Union based on alleged oral representations by Ernst were barred by the statute of frauds, which requires that a representation concerning the credit of a third person be in writing to be admissible as evidence. …

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