Case #3 (4-6) ZZZ Best

1. I do believe that the auditors should be held liable for failing to discover fraud in situations such as ZZZZ Best. Even though top management went through great lengths to fool the auditor, the auditor is to blame for not being aware of the fraud. It was luck that the auditor ended up looking at the very building that Minkow had staged for him. The auditor didnt push the issue of verifiying the jobs for fear of losing Minkowd business. This was definitely not done in the interest of the public (who the auditor should be looking out for), it was done for the firms selfish want for business. Minkow also exploited his confidentiality right in preventing the firm from further check ups. 2. a. It is important to exercise sensitive moral judgments when conducting an audit because the auditors obligation is to society as a whole. Ernst & Whinney failed to meet their moral obligations in this regard. As mentioned above, they opted in the favor of business for the firm rather than doing what was morally correct and investigating their client. b. The criteria for audit independency are that the auditor avoid financial, business and family relationships with their clients. Ernst & Whinney are independent of these relationships with Minkow. c. The purpose of the due care standard is to ensure the quality of service performed by a CPA. I do not believe the Ernst & Whinney met its due care obligations in that they did not provide quality service. Their financial statements could not be relied upon by the financial institutions lending money to Minkow. They did not perform quality work. 3. Based on the given numbers from the financial statements of 1985 and 1986 I would make the following observations: a. The growth in sales and cost of goods sold seem to be consistent between the years. b. The growth in current liabilities is disproportionate to other growth. c. Notes payable and accounts receivable are relatively close in amount. Even though the numbers are greater than expected, I feel that they are not unreasonable. The inquiry that I would like to make based on these numbers is to find out what the $1,768,435 in current liabilities is for. It seems apparent where the money went (cars, material items), but I would like clarification of why it is on the business financial statements. This should have been a red flag to the auditors.