The fraud in question involved duping the public to invest in a company, ZZZZ best carpet company, in reliance on fraudulent financial statements. Minkow doctored the financial statements so that they could appear appealing thus enabling banks to extend credit facilities to him in pretext that he was handling large insurance contracts. He had agreed with one of his friends turned accomplice, who was an insurance risk adjuster, Mr Tom Padgett, that he, Mr Padgett confirms that actually, Minkow had been awarded the contracts, which would enable him to obtain financing from financial institutions.
The biggest fraud, was however, in 1986 when he decided to list the company on the stock exchange and issued a misleading prospectus, as well as financial statements. By the time the company went down in1987, many people lost their money to the fraud. The most blame, however was on the auditor, Ernst and Whinney.
The work done by the auditors was not sufficient to discover the deeply entrenched fraud. George Greenspan, the sole practitioner who carried out the audit admits to omitting serious audit tests in his work. For instance, he admits that in his verification of the existence of the insurance restoration contracts, he relied entirely on the word of Mr Piadgett, who was also a party to the fraud. International standards on audit require that one at least does more work on such, including doing physical verification of the alleged insurance restoration sites.
Secondly, the auditor seems to have overlooked almost obvious and glaring audit evidence that would have triggered a nerve, in the way business was conducted in the company. This included the fact that almost all insurance contracts were from the same party, the figures involved were unusually large, and at the same time, such contracts were evidently entered almost at the time of the public offering. This is enough evidence to raise an eyebrow from any professional accountant worth his salt.
The fraud was discovered after the Los Angeles Times published an article alleging that Minkow was involved in a number of credit card forgeries as a teenager, which led to the auditors investigations into the company's affairs and therefore revealing the mess that had already been done.
I would think that the ability of Minkow to execute such a massive fraud was as a result of his being very cunning and smart, as well as the negligence of the auditors. He is smart in the sense that he managed to ensure everything was in place, to convince the auditors and the lawyers that everything was legit, when in fact it was fictitious. He went to great lengths to cover up any evidence that would have incriminated him. Who knows what would have happened had the newspaper not unearthed his childhood activities?