WASHINGTON — Congressional investigators took a large Los Angeles accounting firm to task Monday for failing to uncover and promptly report indications of massive fraud by ZZZZ Best founder Barry Minkow.
The sharp, often skeptical questioning of the Ernst & Whinney firm's role in the scandal surrounding the now-defunct carpet-cleaning company came at a congressional hearing that produced a broad indictment of industrywide accounting practices.
Officials with Ernst & Whinney, which handled the ZZZZ Best account, defended their firm's record and insisted that they were no different than the bankers, investors and city officials who dealt with ZZZZ Best--"victims" of the "well-orchestrated fraud."
"When all of the facts are finally known, Ernst & Whinney will be vindicated," declared Leroy Gardner, the firm's Western region accounting director.
But members of the House Energy and Commerce Committee's subcommittee on oversight and investigations--which heard testimony on the ZZZZ Best case as part of a review of securities laws--clearly were unconvinced.
'Red Flags' Cited
"There needs to be a total housecleaning of the profession," Rep. Ron Wyden (D-Ore.) said after the hearing, the panel's last on the case. "The current system (for fraud detection and disclosure) is so riddled with loopholes and gaps that people like Minkow go unchecked."
Also voicing skepticism was Melvyn I. Weiss, a New York attorney representing ZZZZ Best investors in a lawsuit against the company and the accounting firm. He testified that the company's rapidly growing profit and its vague documentation of its business contracts were "red flags" that "should have provoked further inquiry."
Minkow and associates, indicted last month on charges of racketeering and fraud, allegedly set up an elaborate network of shell companies and fictitious insurance jobs to falsely inflate ZZZZ Best's assets and dupe investors and bankers out of more than $70 million.
Ernst & Whinney resigned from the account after allegations of financial improprieties at the $400-million carpet cleaning company first surfaced.
While Ernst & Whinney apparently did not violate federal securities laws, Wyden suggested that it abdicated its responsibility as a watchdog over public investments and became, in essence, an advocate for ZZZZ Best.
The Oregon congressman introduced a videotape from a ZZZZ Best awards dinner last year, at which Minkow handed Ernst & Whinny partner Larry D. Gray a trophy and declared him part of "the best accounting and management team in the western hemisphere."
"What kind of message does that send to the public?" Wyden asked. Answering his own question, the congressman--with one finger wrapped around another in a symbol of togetherness--said: "It says that you and the company are like this. "
Countered Gray: "I see nothing wrong with what I did--absolutely not." He said the firm's improprieties were not clearly apparent in the records his firm examined and that initial allegations about ZZZZ Best did not seem credible.
But subcommittee Chairman John D. Dingell (D-Mich.) and Wyden said the accountants' visits to sites of ZZZZ Best jobs should have tipped them off that many were bogus. They also said the firm should not have waited six weeks after resigning from the account to notify the Securities and Exchange Commission of the allegations it had heard.
Gardner asserted that the firm "did everything it was supposed to do and ultimately went beyond what was required." Remarked Gray: "Hindsight is tremendous . . . but what I saw then made sense at that time."