Crazy Eddie, Inc. financial fraud case Essay

crackers Eddie was an American retail store chain run by the Antar family, which was established as a private company in 1969 in Brooklyn, New York by businessmen Eddie and Sam M. Antar. The charade at Crazy Eddie was unrivaled of the longest running in modern times, lasting from 1969 to 1987. Crazy Eddie became a k promptlyn symbol for corporate fraud in its time, but has since been eclipsed by the Enron, Worldcom and Bernie Madoff score scandals.Commencement of fraudThe fraud began almost immediately, with the management of Crazy Eddie to a lower placereporting taxable income through skimming cash sales, paying employees in cash to avoid payroll department taxes and reporting fake insurance claims to the companys carriers. Eddie Antar, the CEO of the company who was the mastermind in the fraud, was skimming money from sales taxes that he only part remitted to the government, darn using part of the money to give steep discounts to customers. Much of the rest of the money he u se to fund a partying lifestyle, while secreting a fortune at home and abroad. He also repackaged used and damaged electronics and resold them to customers as new. When electronics companies refused to supply him because he was selling the products to his customers below list price, he rather sourced the products from suppliers in another(prenominal) countries on the gray market.He used massive sales promotion strategy to promote his companys name and products. The telly ad of the company was very much popular that time. The company began to grow rapidly and had several branches across the country. As the chain grew in size, the Antar family started planning for an initial public offering (initial offering) of Crazy Eddie and scaled back the fraud so that the company would be more profitable and get a higher military rating from the public market.This strategy was a success and Crazy Eddie went public in 1984 at $8 per share. The final phase of the Crazy Eddie fraud began after t he IPO and was motivated by a desire to increase profits so the stock price could move higher and the Antar family could sell its holdings over time. Management now reversed the flow of skimmed cash and moved funds from secret bank accounts and safety deposit boxes into company coffers, booking the cash as revenue. The scheme also involved inflating and creating phony inventory on the books and reducing accounts payable to boost profits at the company.Concealment of fraudThe electronics chain used the young, inexperienced, undereducated and under skilled auditors for the audit purpose. The chain was able to fool young auditors by showing them inventory stock rooms filled with empty boxes of electronics gear, while distracting them with attractive female surveyers so they wouldnt bother to look at what was inside or behind the stacks of boxes. They had a concept that if the auditor was eroding a suit, it was sure he wasnt going to get it dirty by moving the boxes.Eddie Antar was t he mastermind behind the various schemes and hired his relatives to work at the electronics chain to help aid and abet the fraud. Eddie Antar paid for his cousin Sam E. Antar to learn accountancy so he could eventually work at the growing companys small auditing firm, Penn and Horowitz. In 1981, Sam passed the CPA examination with a 90% and scored in the top 1% in the country. He afterwards became the Penn and Horowitz Companys CFO in 1986. All the family members were bound together by a culture of crime and were working as a police squad for collapsement and concealment of crime.Exposure of fraudThe company was making so much money that Eddie Antar was having trouble finding places to put it. He ran out of hide places in his office and home, and eventually began traveling to Israel and Switzerland to stash the money in secret bank accounts. However, the scheme began to unravel when his wife found out he was cheating on her, and the family took sides in the dispute. The fraud was finally uncovered in 1987 after the Antar family was ousted from Crazy Eddie after a successful hostile takeover by an investment group. The acquirer found out how overvalued Crazy Eddie really was and hired another impertinent auditor to look closely at the books.Crazy Eddie limped on for another year before being liquidated to pay creditors. Eddie Antar, the CEO of Crazy Eddie, was charged with securities fraud and other crimes, but fled to Israel before his trial. He spent ternion years in hiding until he was eventually tracked down by authorities in 1992 and extradited back to the U.S. to face criminal charges. Antar and two other family members were also convicted for their role in the fraud. In 1997, Antar was sentenced to eight years in prison and paid large fines. He was later released in 1999.Crazy Eddie vehement FlagsThe red flags in the Crazy Eddie, Inc. fiscal fraud case which could notify the potential fraud were as follows- The tight knit Antar family ruling Cr azy Eddie had realistic absolute control over all aspects of the business. Very poor audit trails and documentation.Major self-dealing transactions and related party transactions by family members. Substantial increases in wages from below market wages before the company went public. In 1985, an attempt was made to falsify certain store inventories which was uncovered by the auditors. The auditors certain an excuse that it was not sanctioned by management. Substantial increases in gross margins, profits, inventories, debit memos etc. from prior periods for no logical reason. Significant volume of dandy deposits in transit at pecuniary year end. Individual deposits in transit extremely high in relation to normal amounts at fiscal year end. Unusually high inventory volumes in stores where physical counts were not observed by external auditors. Inventories in many individual stores were in spare of space capacity.Major differences between amounts confirmed from vendors for accoun ts payable and amounts reported on Crazy Eddies books and records. Use of gross margin method to value inventories during interim periods instead of taking interim inventory counts. Change of accounting methods for purchase discounts and trade allowances in 1987 from cash basis to accrual basis noted in footnotes with no accounting adjustments. Small CPA firm that conducted Crazy Eddie audits before (then big eight firm took over audits) had a significant revenue topic from Crazy Eddie. Controller and later CFO for Crazy Eddie (Sam E. Antar) worked for small CPA firm that audited Crazy Eddie books.Biggest Crazy Eddie Audit ErrorsThe reason, Crazy Eddie was able to conceal and commit the fraud for such a long time could be the inefficiencies of the auditor and the government to uncover the fraud. The government, auditors and investors were fooled by the companys flamboyant founder and CEO, Eddie Antar and his family. approximately of the biggest Crazy Eddie Audit Errors were as fol lows- Assuming a proper audit can be conducted in the absence of credible internal controls. Undereducated, under skilled, and under experienced audit faculty. Over using audits as training grounds for inexperienced audit staff. omit of investigative or forensic accounting skills by auditors. trouble to ask proper questions to the concerned persons.Assuming the answers to good questions as correct without verification. Failure to ask follow up questions.Lack of master copy skepticism.Allowing company staff to distract auditors from doing filed work by engaging in social conversations, thereby wasting time during audits so they have to rush their work in the end to meet the audit deadline. Failure to simultaneously observe inventory counts in all locations. From 1984 to 1987, the auditors did not observe all store inventories or inventories at all locations. Failure to take copies of full inventories taken when going away the premises. Failure to conduct proper test counts of inv entories by relying on company staff to count boxes and allowing company staff to take possession of test counts to make copies on behalf of auditors. Failure to follow through on analytical test issues.Failure to conduct all required analytical testing.Failure to conduct sales cut off testing at year end.Failure to examine items listed as deposits in transit at year end. Failure to age accounts payable.Failure to conduct adequate verification of accounts payable balances. Failure to contact vendors when major discrepancies were place as vendors sent back verification requests. Failure to secure audit work papers left on premises during the audit by leaving keys to trunks containing audit documents on company premises. Allowing company personnel to view audit work papers in process. Auditors signed off on financial reports to outside directors and allowed the issuance of financial statements before the fiscal year 1987 audit was completed and backed into the numbers.Auditors made m isrepresentations to the outside directors just about certain questionable practices and directions from the outside directors to investigate them. Auditors made misrepresentations to the SEC about directions from the audit committee to investigate questionable accounting practices. The auditorsfailed to follow up on recommendations of Crazy Eddies outside counsel law firm Paul, Weiss, Rifkind to investigate irregularities concerning sales to a trans-shipper in 1987. The auditors disagreed with recommendations by Crazy Eddies outside counsel law firm Paul, Weiss, Rifkind to tin more detailed disclosure on Crazy Eddie sales to trans-shippers and other issues.The Fraud TriangleThe Crazy Eddie, Inc. financial fraud case, if linked up with the fraud triangle, following result can be obtained-a. Incentives/ closetsGreedinessDesire of Luxurious LifestyleExpensive extramarital relationships of Eddie AntarPressure to maintain social statusPressure to sustain in competitive marketb. Opport unitiesLack of internal and external controlsLack of audit trailInability of the auditors to judge performance qualityLack of outsiders access to informationc. RationalizationSam Antar, former CFO of Crazy Eddie gave a statement, we committed crime simply because we could. Criminologists like to analyze white call for crime in terms of the fraud triangle incentive, opportunity, and rationalization. We had no rationalization. Simply put, the incentive and opportunity was there, but the morality and excuses were lacking. We never had one conversation about morality during the 18 years that the fraud was going on. This statement shows that there was no rationalization used while committing the fraud, we could assume that following rationalizations could have been used by them- Whatever they were doing did not hurt anybody else.Whatever they were doing was not wrong.Moral justification like, Everyone else is doing it, so it must not be so bad to do this could have been used.Reference s4 Massive Frauds Youve Probably Never Heard Of. (n.d.). Retrieved from http//www.investopedia.com/articles/economics/12/four-unknown-massive-frauds.asp A Convicted Felon Speaks Out about White Collar Crime. (n.d.). Retrieved from http//www.whitecollarfraud.com/947660.html Crazy Eddie Wikipedia, the free encyclopedia. (n.d.). Retrieved May 6, 2014, from http//en.wikipedia.org/wiki/Crazy_Eddie Crazy Eddie Masterminds Video file. (2012, January 7). Retrieved from http//www.youtube.com/watch?v=CP8iO5lvCoU Weirich, T. R., Pearson, T. C., & Churyk, N. T. (2010). Accounting & auditing research Tools & strategies. Hoboken, NJ Wiley.