ZZZZ Best Asset-Inflation Proceeding: Inflated Assets in a Public Offering

The Securities and Exchange Commission alleged that ZZZZ Best’s financial statements overstated assets in a $15 million public securities offering. For a project accountant or auditor, the connection worth examining runs from the number investors saw back to the business records supporting it. You may know what an entry represented, who supplied its support, or why the explanation given outside the company differed from what happened inside it.

This page follows the commission’s asset-inflation allegations concerning ZZZZ Best and its advisers. Our broader account of securities offering fraud follows the promises used to raise capital and the business behind them.

The Financial Statements Behind the Offering

ZZZZ Best’s financial statements carried the alleged asset inflation into its offering documents. The Securities and Exchange Commission’s August 27, 1992 News Digest describes a scheme to inflate assets in the Southern California company’s fiscal 1986 and first-quarter fiscal 1987 statements. Those statements appeared in registration statements filed in October and November 1986.

In its News Digest, the SEC described a related complaint alleging that ZZZZ Best’s October 1986 financial and registration statements claimed millions of dollars in insurance-restoration work. The SEC alleged that the insurance-restoration business did not exist and that the reported asset values were grossly inflated.

That connection puts an accounting entry in front of an investor deciding whether to supply capital. In a business raising money, the contract, accounting treatment and financial statement are connected parts of the same representation. We see the inversion in the SEC’s allegation: the company was asking investors for real money on the strength of assets it allegedly overstated.

For someone who helped prepare a financial statement, the useful comparison is the supporting information available when the number was chosen and the version ultimately presented to investors. Review comments, entries and approvals can show how that choice was made.

The SEC Accused the Company’s Advisers

The Securities and Exchange Commission’s account describes participation by the company’s former general counsel and a financial consultant. Its civil complaint in the U.S. District Court for the Central District of California accused the former general counsel of participating in the asset-inflation scheme. The digest identifies the financial consultant as a defendant in a separate, related SEC action.

The former general counsel agreed to a permanent court order prohibiting violations of the securities antifraud provisions identified in the complaint. For an accountant trying to understand who knew what, the important connection is between the disputed financial statements and the advisers the commission accused of helping inflate them.

What Evidence Shows Inflated Assets Behind an Offering?

For a concern about inflated assets, useful securities fraud evidence connects the reported activity to the underlying transaction and the people who understood it. If your concern involves a customer balance for work that never happened, we would examine how the contract, customer account and payment history fit together. That comparison starts with your knowledge of the work the company claimed to have performed.

For a balance recorded as money owed by a customer, we would compare the promised work, the customer’s understanding and the source of any payment. We would then trace how the balance reached the financial statement used to raise money. In fictitious-sales and circular-payment cases, the cash movement and the business explanation need to be examined together.

The review history matters alongside the transaction. An auditor may know which supporting documents were requested, who supplied the responses and which questions remained open when the financial statement was completed. A project accountant may recognize a mismatch between the customer account and the work being described. Those are different views of the same reported number, and our work is to connect them.

When an Audit Question Goes Unanswered

A separate Securities and Exchange Commission proceeding involving BDO USA shows why an unresolved question can matter as much as the final audit opinion. In its September 9, 2015 order, the commission recorded BDO’s factual admissions concerning an unexplained $2.3 million purported deposit at General Employment Enterprises. BDO had conflicting information from the bank and management, demanded an independent investigation, then withdrew that demand without a reasonable explanation and issued unqualified audit opinions.

For someone who knows the work behind an auditor’s sign-off, the investigation demand and the decision to withdraw it show what happened to the unresolved concern. The demand proved easier to remove than the question.

What Accounting Fraud Research Adds

Research gives a reason to take the person who understands the underlying records seriously. In The Significance of Whistleblowing as an Anti-Fraud Measure, published in the Journal of Forensic & Investigative Accounting in 2018, researchers examined fraud data collected by the Association of Certified Fraud Examiners. Their analysis of 4,943 frauds with complete data found whistleblower detection in 35.9% of the sample, compared with 21.4% detected through internal controls.

The study also found that whistleblowing became more likely to detect a fraud as the number of people participating in it increased. The person who can explain why a customer balance makes no sense needs someone who can connect that knowledge to the contracts, payments and disclosures. We approach that connection as the beginning of the case.

A separate 2019 working paper hosted by MIT Sloan, Do Corporate Whistleblower Laws Deter Accounting Fraud?, examined companies held by state pension funds as states adopted False Claims Acts. It estimated a 5% to 9% reduction in accounting-fraud likelihood after exposure to those laws, using measures of potential accounting manipulation. The finding concerns deterrence across the companies studied: the possibility of someone speaking up can matter before a false number is exposed.

The Whistleblower Question for an Accountant

For someone reporting securities fraud today, SEC whistleblowers can earn 10% to 30% of sanctions collected in qualifying actions with sanctions over $1 million. Where suspected conduct also involves government money, the applicable whistleblower program is another question we address with you. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. For accountants and auditors with questions about their role, we work through those questions with securities fraud whistleblower lawyers who understand how the information was obtained and what it shows.

You Know What the Entry Was Supposed to Represent

If you know why a reported asset, customer balance or audit response does not match the business, speak with our Whistleblower Experts about the number that does not match. We build your strongest securities fraud whistleblower case with you, bring in securities fraud whistleblower lawyers who understand accounting evidence, and stay beside you through the process.