November 21, 2014

International Fraud Awareness Week is drawing to a close. In the spirit of understanding history so we are not doomed to repeat it, I would like to share one more post this week. Like a Swiss Army knife, this story has a little bit of everything. If you’d like to read about a case involving fraudulent financial reporting, a Ponzi scheme, securities violations, credit card fraud, or even mail fraud or tax evasion, this is the case for you.

Barry Minkow was the centerpiece of what is arguably the largest fraud of my generation, and perhaps many others before and since. Barry was the founder and CEO of ZZZZ Best (pronounced “Zee Best”), which started out as a legitimate carpet cleaning company in southern Southern California. It quickly turned into a house of cards built upon a foundation of fake customers, fake projects, and fake supporting documents. This metaphorical house of cards turned into a literal mansion and riches for Minkow before it all came crashing down.

Unfortunately, Minkow didn’t stop with ZZZZ Best. According to this page on Barry Minkow, after he was released from prison for his ZZZZ Best conviction, he perpetrated and was convicted of two additional crimes that will keep him in prison for a combined period longer than his ZZZZ Best sentence term.

While the story is tremendously compelling, it also provides several lessons for management of businesses building a control structure, due diligence teams evaluating investment opportunities, and auditors of all sorts. Hindsight is a wonderful thing in a case like this, especially since it is 30 years old. This case really points out the importance of risk assessments, a positive tone at the top, background checks on personal history and known business associates for new investment/vendor relationships, and the notion of trusting your gut and not giving up until you are completely satisfied.

I encourage you to review this case and use the hindsight observations not to point out the flaws of those involved, but to understand the risks associated with your own situation and how you might mitigate those risks. That, after all, is what International Fraud Awareness Week is all about.

© Clark Nuber PS and Focus on Fraud, 2014. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Focus on Fraud with appropriate and specific direction to the original content.

This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.