Legal Liability Issues The ZZZZ Best fraud was one of the largest of its time. ZZZZ Best reportedly settled a shareholder class action lawsuit for $35 million. Ernst & Whinney was sued by a bank that had made a multimillion-dollar loan based on the financial statements for the three-month period ending July 31, 1986. The bank claimed that it had relied on the review report issued by Ernst & Whinney in granting the loan to ZZZZ Best. However, the firm had indicated in its review report that it was not issuing an opinion on the ZZZZ Best financial statements. The judge ruled that the bank was not justified in relying on the review report because Ernst & Whinney had expressly disclaimed issuing any opinion on the statements. Barry Minkow was charged with engaging in a $100 million fraud scheme. He was sentenced to a term of 25 years
Questions
1. Do you believe that auditors should be held liable for failing to discover fraud in situations such as ZZZZ Best, where top management goes to great lengths to fool the auditors? Answer this question with respect to the ethical and professional responsibilities of audit professionals when conducting an audit.
2. Discuss the red flags that existed in the ZZZZ Best case and evaluate Ernst & Whinney's efforts with respect to fraud risk assessment. Do you think Ernst & Whinney's relationship with ZZZZ Best influenced risk assessment and the work done on the audit?
3. These are selected numbers from the financial statements of ZZZZ Best for fiscal years 1985 and 1986.