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Crazy Eddie was an American retail store string run by Antar relatives, which was founded as a exclusive company in 1969 in Brooklyn, Ny by business men Eddie and Sam Meters. Antar. The fraud in Crazy Eddie was one of the longest utilizing modern times, long lasting from 1969 to 1987. Crazy Eddie became a known sign for company fraud in its time, although has as been eclipsed by the Enron, Worldcom and Bernie Madoff accounting scandals.
Commencement of fraud
The fraud commenced almost right away, with the supervision of Crazy Eddie underreporting taxable income through skimming cash revenue, paying workers in cash to avoid salaries taxes and reporting imitation insurance statements to the provider’s carriers.
Eddie Antar, the CEO in the company who was the mastermind in the fraud, was skimming money coming from sales income taxes that he only partially remitted to the government, while using the part of the money to give sharp discounts to customers. Most of the rest of the funds he utilized to fund a partying life-style, while secreting a fortune at home and in foreign countries.
This individual also repackaged used and damaged electronics and sold again them to consumers as fresh. When electronics companies declined to supply him because he was selling these products to his customers below list cost, he rather sourced the merchandise from suppliers in other countries for the gray market.
He utilized massive revenue promotion technique to promote his company’s name and products. The television advertisement of the firm was greatly popular time. The company started to grow rapidly and had a lot of branches across the country. As the chain grew in size, the Antar family members started planning for an initial community offering (IPO) of Crazy Eddie and scaled backside the scams so that the firm would be more profitable and get a bigger valuation from your public industry.
This strategy was a success and Crazy Eddie went public in 1984 at $8 per share. The final stage of the Crazy Eddie fraud began following your IPO and was enthusiastic by a prefer to increase profits so the inventory price can move larger and the Antara family can sell their holdings after some time. Management today reversed the flow of skimmed funds and transferred funds coming from secret checking accounts and protection deposit containers into organization coffers, reservation the cash while revenue. The scheme also involved inflating and creating phony products on hand on the catalogs and lowering accounts payable to boost income at the organization.
Concealment of fraud
The electronics string used the young, inexperienced, undereducated and under qualified auditors for the examine purpose. The chain could fool small auditors simply by showing all of them inventory share rooms filled up with empty containers of consumer electronics gear, although distracting associated with attractive female workers therefore they more than likely bother to check out what was inside or behind the piles of packing containers. They had an idea that if the auditor was wearing a suit, it was sure he had not been going to obtain it dirty by moving the boxes.
Eddie Antar was your mastermind behind the various schemes and appointed his relatives to work on the consumer electronics chain to aid aid and abet the fraud. Eddie Antar taken care of his relative Sam Electronic. Antar to master accounting and so he can eventually act on the developing company’s little auditing company, Penn and Horowitz. In 1981, Mike passed the CPA exam with a 90% and scored in the top 1% in the area. He later became the Penn and Horowitz Company’s CFO in 1986. All the family users were bound together by a culture of crime and were doing work as a team for commitment and concealment of crime.
Publicity of scam
The company was making a whole lot money that Eddie Antar was having difficulty finding spots to put this. He ran out of covering places in the office and home, and eventually began traveling to Israel and Switzerland to stash the amount of money in magic formula bank accounts. Nevertheless , the plan began to unravel when his wife found out he was cheating on her, and the family required sides inside the dispute. The fraud was finally revealed in 1987 after the Antara family was ousted by Crazy Eddie after a good hostile takeover by an investment group. The acquirer found out how overvalued Crazy Eddie really was and hired an additional outside auditor to appearance closely at the books.
Crazy Eddie limped along for another year before being liquidated to spend creditors. Eddie Antar, the CEO of Crazy Eddie, was recharged with securities fraud and other crimes, but fled to Israel before his trial. He put in three years in hiding until he was at some point tracked down by authorities in 1992 and extradited back to the U. S. to face criminal expenses. Antar and two various other family members were convicted for role inside the fraud. In 1997, Antara was sentenced to ten years in prison and paid large fines. He was later released in 1999.
Crazy Eddie Red Flags
The warning flags in the Crazy Eddie, Incorporation. financial fraudulence case that could notify the actual fraud were as follows: – The tight knit Antara family ruling Crazy Eddie had virtual absolute control of all areas of the business. Not of very good audit trails and paperwork.
Major self-dealing transactions and related party transactions simply by family members. Considerable increases in wages from below market wages ahead of the company travelled public. In 1985, an effort was made to falsify particular store arrays which was exposed by the auditors. The auditors accepted an excuse that it was certainly not sanctioned by simply management. Significant increases in gross margins, profits, stocks, debit memos etc . from prior times for simply no logical cause. Significant amount of outstanding deposit in flow at money year end. Individual debris in transportation extremely loaded with relation to normal amounts in fiscal 12 months end. Unusually high inventory volumes in stores where physical counts weren’t observed by simply outside auditors. Inventories in lots of individual retailers were above space potential.
Major dissimilarities between portions confirmed from vendors to get accounts payable and quantities reported in Crazy Eddie’s books and records. Usage of “gross margin method to value arrays during interim periods rather than take interim products on hand counts. Alter of accounting methods for order discounts and trade allowances in 1987 from cash basis to accrual basis noted in footnotes without having accounting alterations. Small CPA firm that conducted Crazy Eddie audits before (then big 8 firm took over audits) a new significant earnings base from Crazy Eddie. Controller sometime later it was CFO for Crazy Eddie (Sam Elizabeth. Antar) worked for little CPA organization that audited Crazy Eddie books.
Biggest Crazy Eddie Audit Mistakes
The reason, Crazy Eddie was able to conceal and commit the fraud pertaining to such a long time may be the inefficiencies in the auditor as well as the government to uncover the fraud. The us government, auditors and investors were fooled by the company’s showy founder and CEO, Eddie Antar great family. A number of the biggest Crazy Eddie Examine Errors were as follows: – Assuming an effective audit may be conducted in the absence of credible internal settings. Undereducated, beneath skilled, and under knowledgeable audit personnel. Over applying audits since training grounds for unsophisticated audit staff. Lack of investigative or forensic accounting skills by auditors. Failure might proper questions to the worried persons.
Supposing the answers to very good questions since correct with no verification. Failing to ask follow up questions.
Lack of specialist skepticism.
Allowing company personnel to distract auditors by doing recorded work simply by engaging in interpersonal conversations, thereby wasting period during audits so they must rush their work in the finish to meet the audit deadline. Failure to simultaneously observe inventory matters in all places. From 1984 to 1987, the auditors did not notice all retail outlet inventories or inventories in any way locations. Failing to take copies of complete inventories taken when going out of the premises. Failure to conduct proper test is important of stocks by relying on company staff to count number boxes and allowing company staff to take possession of test counts for making copies for auditors. Failing to follow through on analytical test issues.
Failure to conduct all required deductive testing.
Failure to conduct sales cut off tests at year end.
Failure to measure items listed as deposit in transit at 12 months end. Failing to age accounts payable.
Failure to conduct sufficient verification of accounts payable balances. Failure to contact vendors when significant discrepancies had been identified as sellers sent back verification requests. Inability to secure audit work documents left upon premises during the audit by leaving secrets to trunks containing review documents upon company building. Allowing firm personnel to look at audit operate papers in process. Auditors signed off on economic reports to outside owners and allowed the issuance of financial assertions before the monetary year 1987 audit was completed and backed in to the numbers.
Auditors made misrepresentations to the outdoors directors about certain suspect practices and directions externally directors to review them. Auditors made misrepresentations to the SEC about directions from the review committee to investigate questionable accounting practices. The auditorsfailed to adhere to up on tips of Crazy Eddie’s outside the house counsel lawyer Paul, Weiss, Rifkind to investigate irregularities concerning sales into a trans-shipper in 1987. The auditors disagreed with recommendations by Crazy Eddie’s outside counsel practice Paul, Weiss, Rifkind to provide more detailed disclosure on Crazy Eddie revenue to trans-shippers and other problems.
The Fraud Triangle
The Crazy Eddie, Inc. financial fraudulence case, in the event that linked up with the fraud triangle, pursuing result can be acquired: –
a. Incentives/Pressures
Greediness
Desire of Deluxe Lifestyle
Expensive extramarital relationships of Eddie Antar
Pressure to maintain interpersonal status
Pressure to sustain in competitive industry
m. Opportunities
Lack of internal and external controls
Lack of taxation trail
Inability from the auditors to judge performance quality
Lack of outsiders’ entry to information
c. Rationalization
Mike Antar, previous CFO of Crazy Eddie gave a press release, ” “we committed criminal offense simply because we’re able to. Criminologists love to analyze light collar offense in terms of the ‘fraud triangle’ ” bonus, opportunity, and rationalization. We had no rationalization. In other words, the incentive and opportunity was there, however the morality and excuses were lacking. All of us never acquired one chat about morality during the 18 years which the fraud was going on. This statement demonstrates there was simply no rationalization used while carrying out the fraud, we could imagine following rationalizations could have been utilized by them: – Whatever we were holding doing would not hurt anybody else.
Whatever they were carrying out was not incorrect.
Ethical justification like, “Everyone else is doing it, so it must not be so bad to accomplish this might have been used.
Recommendations
5 Massive Frauds You’ve Probably Hardly ever 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-colored Collar Offense. (n. deb. ). Retrieved from http://www.whitecollarfraud.com/947660.html Crazy Eddie ” Wikipedia, the cost-free encyclopedia. (n. d. ). Retrieved May well 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, Big t. R., Pearson, T. C., & Churyk, N. T. (2010). Accounting & auditing research: Equipment & approaches. Hoboken, NJ: Wiley.
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