Magazine article The CPA Journal

Lessons to Be Learned - ZZZZ Best, Regina, and Lincoln Savings

Magazine article The CPA Journal

Lessons to Be Learned - ZZZZ Best, Regina, and Lincoln Savings

Article excerpt

By James D. Stice, PhD, Brigham Young University, W. Steve Albrecht, PhD, CPA, Brigham Young University, and Leslie M. Brown, Jr., Price Waterhouse

Public accountants continually find themselves in liability disputes involving the quality of services provided by their firms.

Although standard setters have refined the auditor's role in detecting material errors and irregularities, the recent crisis involving the savings and loan industry illustrates that accountants have a long way to go before the public is satisfied with their performance. Instances abound of how carefully constructed frauds can deceive accountants, banks, creditors, stockholders, government agencies and others. This article uses three recent cases, ZZZZ Best, Regina, and Lincoln Savings & Loan, to highlight some of the issues that accountants must be aware of when dealing with clients. The red flags common to these three companies are identified to suggest important early warning signals for auditors.

Lessons to Be Learned

There are several lessons that can be learned from ZZZZ Best, Regina, and Lincoln Savings that should help accountants exercise more care in the future. The first and most discouraging of these lessons is that a well-orchestrated fraud will often succeed (at least for a time) even against well-intentioned, hard-working individuals. The people deceived in these three examples include at least four large CPA firms, several Boards of Directors, vendors, customers, investors, attorneys, underwriters, the press, state and federal governments and numerous charitable organizations that executives of these companies supported.

ZZZZ Best went to extraordinary lengths to deceive its victims. For example, Barry Minkow, ZZZZ Best's president, spent $2 million to lease an entire building in downtown San Diego and another $2 million to hire an army of construction workers to refurbish the inside of the building to make it look like a legitimate restoration project when the auditors insisted on visiting the site. The executives of Lincoln Savings spent over $50 million in legal fees to fend off challenges from regulators and other investigators.

It should be noted that Regina and ZZZZ Best are proven frauds, but Lincoln Savings is only an alleged fraud.

Other, more constructive lessons to be learned from these cases include 1) accountants should exercise extreme care when dealing with young, extremely rapidly growing organizations, especially those that change the nature of their business, 2) accountants must exercise extreme care when associating with new clients, and 3) accountants must thoroughly investigate the backgrounds and management characteristics of key officers.

Young, Rapidly-Growing Organizations

ZZZZ Best went from a start-up organization with no assets, to a multi-million dollar company in less than five years. During this period, its primary business changed from carpet-cleaning to insurance restoration. In a prospectus related to a public offering in late 1986, the company stated that 86% of ZZZZ Best's business was in the insurance restoration area. However, an investigation of several insurance restoration projects, including a $2.3 million job in an eight story building in Arroyo Grande, California, a $7 million contract in Sacramento, a $2.8 million job in San Diego, and a $13.8 million job in Dallas, resulted in none of the jobs being verified. In fact, Arroyo Grande was a town of only 13,000 people with no building over three stories, city and county officials in Sacramento never issued permits for any such job in Sacramento, the insurance company who supposedly awarded the San Diego job says it had nothing to do with any such job, and in Dallas there were no restoration jobs approaching $13.8 million.

Regina went from a one product company with $60 million in sales in 1985 to a four product company with $181 million in sales in 1988. In the effort to boost sales, however, proper testing of new products was eliminated. …

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