Case 1: ZZZZ Best, Inc
Barry Minkow was a young entrepreneur who established the ZZZZ Best Company in 1982. ZZZZ Best Company grew exponentially because its profits increased from hundreds of thousands to millions within a span of three years. By 1987, the company’s property cost $100 million while its value in the stock market was over $200 million. Exponentially growth of the company elicited suspicion from the investors, public, insurance, government, and auditing firms. Auditing carried out on the ZZZZ Company revealed that it had fictitious property and transacted fraudulent insurance contracts that led to the skyrocketing of its profits. Auditing firms’ analyses and congressional reports finally revealed that ZZZZ Best Company was fraudulent and they prosecuted the company for breaching contract conditions of business and insurance.
Securities and Exchange Commission worked together with auditing firms in ensuring that fraudulent activities of ZZZZ Best Company remain concealed. George Greenspan, an independent auditor, noted that there were fictitious insurance restoration contracts but he did not attribute them on his audit report. To cover up his fraudulent schemes, Barry Minkow replaced George Greenspan with an auditing firm Ernst & Whinney, which discovered the existence of fictitious insurance restoration contacts. The revelation of fraudulent insurance contracts by Ernst & Whinney to the Congress committee and Price Waterhouse led to the arrest and the subsequent imprisonment of Barry Minkow for 25 years due to conviction of 57 counts of fraud.
Case 2: Enron
Arthur Andersen & Company was the accounting firm that was responsible for auditing Enron. The accounting firm produced auditing reports that blinded investors and creditors alike, yet the company was running bankrupt. The accounting firm did consider special partnership entities as part of the vital records that placed Enron Company to be one of the leading progressive companies in the stock market. Investigations by the Securities and Exchange Commission showed that Arthur Anderson & Company abetted fraudulent activities in Enron Company by attributing fictitious special partnership entities in its auditing records. Investors and creditors sued Arthur Anderson & Company which led to the eventual collapse of a once-trusted accounting firm.
The chief executive officer of Enron Company, Kenneth Lay, together with his executive assistant, Jeffrey Skilling, did make a significant contribution to the gas company before the economic meltdown that caused great losses. To salvage the company from great losses, the management used special partnership entities in their records to magnify auditing figures in their favor and increase their value in the stock market. Unfortunately, the Securities and Exchange Commission unearthed their fraudulent schemes. The federal court found Kenneth Lay and Jeffrey Skilling guilty of financial fraud and sentenced both for 24 years.
Case 3: First Securities Company of Chicago (Hochfelder)
Following fraudulent schemes of Ladislas Nay in his investment company, Escrow Syndicate, investors sued First Securities Company of Chicago, Ernst, &Ernst auditing firm, and Midwest Stock Exchange Commission for failing to detect the fraudulent schemes that would prevent Escrow Syndicate from defrauding unsuspecting investors. Ernst & Ernst accounting firm is the most responsible for carrying out inefficient auditing of the First Securities Company of Chicago for it did not detect the existence of Escrow Syndicate. The Escrow Syndicate continued unnoticed because it employed mails when carrying out its fraudulent transactions. Eventually, the high court and Security Exchange Commission ruled that auditing firms should be responsible for their negligence to detect fraudulence and protect investors.
Under the guise of First Securities Company of Chicago, Ladislas Nay managed to run Escrow Syndicate secretly with the objective of evading Ernst & Ernst accounting firm and Security Exchange Commission. Since he employed mails in transacting his fraudulent schemes, Ladislas managed to defraud his investors secretly. According to the Security Exchange Act of 1934, Ladislas is guilty of employing manipulative and deceptive means of mails to convince and defraud investors. Ladislas Nay mailed his customers fake statements showing growing investments so that they do not become suspicious about the Escrow Syndicate.
Case4: Fred Stern & Co., (Ultramares Corp v Touche)
Touche Niven, & Company is an accounting firm charged with misrepresentation of auditing records due to fraudulence and negligence. Fred Stern & Company employed Touche, Niven & Company to conduct auditing and prepare a certified balance sheet statement showing financial status of the company to enable it borrow loans from banks and other potential creditors. Although Fred Stern & Company was insolvent, the accounting firm, through their negligence and intent to abet fraudulence, certified the false balance sheet while aware of possible repercussions. The court ruled that the accounting firm was liable for negligence that led to defrauding of Ultramares Corporation since they did not consider consequences of certifying balance sheet. It also stated that the accounting firm participated in fraudulence because they prepared false balance sheet yet the company was insolvent.
In Fred Stern & Company, Stern wanted to expand his company but the auditing reports showed that company was insolvent and unable to access or qualify for loans from banks and other credit institutions. To obtain loans, Stern devised to influence the accounting firm to prepare certified balance sheet. He used certified balance sheet to obtain huge amount of loan form Ultramares Corporation. After Ultramares Corporation realized that Stern Company was already bankrupt, it sued the accounting firm for preparing false balance sheet and certifying it. Thus, Stern was guilty of defrauding his client as an accomplice with the accounting firm.
Case 5: Crazy Eddie, Inc
The public saw the exponential growth of Crazy Eddie Company and investors flocked into to buy shares when it gave out initial public offer in the stock market. However, investigations by the Securities and Exchange Commission revealed that auditing firms had been overstating Crazy Eddie’s profits and the value of its property to win public confidence. Main Hurdman and Peat Marwick are the two accounting firms that merged and cooperated in exaggerating the profits and stock value of Crazy Eddie Company. When the company collapsed, investors and creditors sued the auditing firms for aiding and abetting fraudulent through overstating inventory records and understating payment statements. As an entrepreneur of the Crazy Eddie Company, Antar Eddie managed to convince customers to buy his electronic gadgets by selling them at cheaper prices, advertising widely, and offering warranties. Increased competition in the market of electronics threatened his business and compelled him to hire a chief financial officer who collaborated with auditing firms in cleaning of financial records in preparation of initial public offer of Crazy Eddie’s shares in the stock exchange. The federal court found Eddie Antar guilty of financial fraud and sentenced him for 12 years, which he later appealed to be 7years
Case6: Just for Feet Inc
Delloitte and Touche is an auditing firm that was responsible for auditing Just for Feet Company under chief executive officer, Harold Ruttenberg. The Just for Feet Company lucratively grew by selling sportswear products while collaborating with mega companies such as Adidas, Reebok, and Nike among other investors. The change of chief executive officer coupled with losses that made the company default paying over 200 million dollars did scare investors. To salvage financial status of the company, Don-Allan Ruttenberg convinced vendors to sign fictitious allowance receivables. Delloitte & Touche managed to unmask the fraudulent schemes and reported the matter to the Securities and Exchange Commission.
Harold Ruttenberg started Just for Feet Company and propelled it to greater heights. Taking advantage of business growth, Harold Ruttenberg attracted many investors and collaborated with vendors such as Nike, Adidas and Reebok is carrying out promotions of sportswear products. In 1999, the business experienced competition causing it to make some losses and default paying bonds worth 200 million dollars. This forced Don Allan Ruttenberg to fleece vendors and investors. Eventually, federal court found Don Allan guilty of accounting fraud, fined 500 000 dollars and imprisoned him for 20 months.