Crazy Eddie, Inc. financial fraud case Essay

half-baked Eddie was an Ameri give the bounce retail store drawstring miss by the Antar family, which was established as a private companion in 1969 in Brooklyn, New York by businessmen Eddie and surface-to-air missile M. Antar. The snake oil at grim Eddie was superstar of the longest running in new(a) cartridge clips, lasting from 1969 to 1987. distressed Eddie became a cognise symbol for corporate imposture in its time, still has since been eclipsed by the Enron, Worldcom and Bernie Madoff accounting s undersurfacedals. fount of trickThe fraud began almost immediately, with the advocatoring of doddering Eddie netherreporting taxable income through grazing currency gross gross revenue, paying employees in cash to avoid payroll taxes and reporting mistaken insurance claims to the high societys carriers. Eddie Antar, the chief operating officer of the union who was the guide in the fraud, was skim money from gross revenue taxes that he just break awayially re mitted to the goernment, magic spell victimization part of the money to give steep discounts to customers. some(prenominal) of the rest of the money he apply to fund a partying lifestyle, while secreting a fortune at home and abroad. He also repackaged apply 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 on a lower floor list toll, he instead sourced the products from suppliers in new(prenominal) countries on the gray grocery.He used massive sales promotional material strategy to promote his federations name and products. The television ad of the company was very much popular that time. The company began to grow rapidly and had several branches crosswise the country. As the chain grew in size, the Antar family started supply for an initial public offering (IPO) of half-baked Eddie and scaled underpin the fraud so that the company would be more productive a nd enchant a higher military rating from the public merchandise.This strategy was a victor and gruesome Eddie went public in 1984 at $8 per share. The final phase of the Crazy Eddie fraud began afterward the IPO and was cause by a desire to addition profits so the stock price could move higher and the Antar family could sell its holdings over time. Management now reversed the operate of skimmed cash and moved specie from secret bank accounts and safety pay back boxes into company coffers, booking the cash as revenue. The scheme also involved inflating and creating phony archive on the books and reddeneducing accounts due to boost profits at the company. screening of fraudThe electronics chain used the young, inexperient, undereducated and under skilled attenders for the examine purpose. The chain was able to fool young inspectors by showing them stocktaking stock suite filled with empty boxes of electronics gear, while perturbing them with harming female tender s so they wouldnt exsert to look at what was inside or behind the stacks of boxes. They had a plan that if the inspector was wearing a suit, it was legitimate he wasnt going to get it dirty by moving the boxes.Eddie Antar was the mastermind behind the various schemes and hired his relatives to snip at the electronics chain to help encourage and abet the fraud. Eddie Antar paid for his cousin surface-to-air missile E. Antar to learn accounting so he could last work at the suppuration companys handsome auditing level, Penn and Horowitz. In 1981, Sam passed the CPA examination with a 90% and scored in the top 1% in the country. He after became the Penn and Horowitz accompanys CFO in 1986. wholly the family members were bound together by a culture of crime and were working as a team for commitment and book binding of crime.Exposure of fraudThe company was qualification so much money that Eddie Antar was having scuffle finding places to put it. He ran kayoed of covert p laces 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 carry 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 prosperous hostile takeover by an coronation group. The acquirer found out how overvalued Crazy Eddie really was and hired an separate outback(a) auditor to look closely at the books.Crazy Eddie limped along for another yr before being liquidated to pay creditors. Eddie Antar, the chief operating officer of Crazy Eddie, was charged with securities fraud and other crimes, but fled to Israel before his trial. He worn out(p) three twelvemonths in hiding until he was eventually tracked downward(a) 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 viii yrs in prison house and paid large fines. He was later released in 1999.Crazy Eddie Red FlagsThe red flags in the Crazy Eddie, Inc. monetary fraud case which could notify the potential fraud were as quest afters- The tight knit Antar family popular opinion Crazy Eddie had virtual absolute guarantee over all aspects of the business. Very short audit trails and documentation.Major self-dealing transactions and associate party transactions by family members. red-blooded increases in wages from below market wages before the company went public. In 1985, an attempt was made to falsify current store inventories which was uncovered by the auditors. The auditors accredited an excuse that it was not sanctioned by management. Substantial increases in make margins, profits, inventories, account memos etc. from prior periods for no ordered reason. Significant volume of outstanding deposits in transit at fiscal year end. Individual deposits in transit super high in relation to pattern amounts at fiscal year end. unco high inventory volumes in stores where somatogenetic counts were not asseverated by international auditors. Inventories in many individual stores were in excess of space capacity.Major differences amidst amounts confirmed from vendors for accounts payable and amounts reported on Crazy Eddies books and records. Use of gross margin method to value inventories during temporary periods instead of taking interim inventory counts. Change of accounting methods for purchase discounts and patronage allowances in 1987 from cash basis to collection basis noted in footnotes with no accounting adjustments. Small CPA firm that withdrawed Crazy Eddie audits before (then big eight firm took over audits) had a satisfying revenue base from Crazy Eddie. accountant and later CFO for Crazy Eddie (Sam E. Antar) worked for small CPA firm that audited Crazy Eddie books.Biggest Crazy Eddie Audi t ErrorsThe reason, Crazy Eddie was able to keep back 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. somewhat of the biggest Crazy Eddie Audit Errors were as follows- take for granted a proper audit can be be incured in the absence of credible internal controls. Undereducated, under skilled, and under experienced audit staff. Over using audits as training grounds for inexperienced audit staff. wishing of investigative or forensic accounting skills by auditors. failure to ask proper questions to the concerned persons. assumptive the answers to good questions as correct without verification. calamity to ask follow up questions. deprivation of professional skepticism.Allowing company staff to distract auditors from doing filed work by engaging in social conversations, at that pl aceby wasting time during audits so they have to rush their work in the end to meet the audit deadline. trial 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. also-ran to take copies of encompassing inventories taken when leaving the premises. Failure to conduct proper seek counts of inventories by relying on company staff to count boxes and allowing company staff to take possession of raise counts to make copies on behalf of auditors. Failure to follow through on analytical test issues.Failure to conduct all need 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 identified as vendors sent back verification requests. F ailure to secure audit work paper left on premises during the audit by leaving keys to trunks containing audit documents on company premises. Allowing company strength to view audit work document in process. Auditors signed off on financial reports to away directors and allowed the issuance of financial statements before the fiscal year 1987 audit was completed and backed into the numbers.Auditors made misrepresentations to the impertinent directors just about certain self-styled 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 legality 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, Rifk ind to provide more precise 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/ cartsGreedinessDesire of luscious LifestyleExpensive extramarital relationships of Eddie Antar printing press to maintain social statusPressure to sustain in competitive marketb. OpportunitiesLack of internal and external controlsLack of audit trailInability of the auditors to approximate performance qualityLack of outsiders vex to informationc. RationalizationSam Antar, antecedent CFO of Crazy Eddie gave a statement, we commit crime simply because we could. Criminologists like to psychoanalyze white collar 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 conversati on about morality during the 18 age 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 disadvantage anybody else.Whatever they were doing was not wrong.Moral exculpation like, Everyone else is doing it, so it must not be so bad to do this could have been used.References4 Massive Frauds Youve Probably neer Heard Of. (n.d.). Retrieved from http//www.investopedia.com/articles/economics/12/four-unknown-massive-frauds.asp A Convicted Felon Speaks Out about unclouded 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). write up & auditing research Tools & strategies. Hoboken, NJ Wiley.