Eddie Antar (Crazy Eddie) dominated the retail consumer electronics market in the New York City metropolitan area. By 1987,Antar’s firm, Crazy Eddie , Inc. , had 43 retail outlets, sales exceeding $350 million, and outstanding stock with a collective market value of $600 million. During his term as the company’s chief executive. Antar had personal gain of more than $70 million. The first step Crazy Eddie done in order to gain success was to expand his little store into many big consumer electronics supermarket and stocking the stores shelves with every electronic gadget available on the market.
As the firm grew rapidly in the 1970 and 1980, antar’s ability to buy large quantities in lower discounted prices allowed him to become an in-between supplier for many smaller retail electronic stores in the New York area and expand his revenues significantly. The most important part of antar success was his emphasis on advertising in order to reach the wide public; to achieve it he filled the radio and television with endless amount memorable commercials.
To further distinct his store from the competitors, the company promised to refund the difference between the selling price of a product and any lower price for that same item that a customer found in other stores within 30 days of the purchase date In 1983, Antar decided to go public and sell stocks of Crazy Eddie in order to raise capital to finance an aggressive expansion program. When applying to go public, the underwritre who examine the company mention several significant problems with the company the question the ethical performance of the company and needed to be addressed in order before the company can be publicaly traded.
The most questionable problem was the fact that nearly all of the company’s key executives were members of the Antar family which may result in problematic internal controls and make the discovery of fraudulent acts difficult because of the lack of independence of the different executives. Additional issues were the family members high salaries (Antar’s wife and mother, who receved salaries approaching $100,000 for little or no work. ) and many company transactions which were unrelated to the company’s principal line of business (extensive related-party transactions, interest-free loans to employees, and speculative investments).
The underwriter warned Antar that investors would question the competence of Crazy Eddie’s executives who were his relatives and urged him to hire a CFO who had experience with a public company and who was not a member of the Antar family however antar chose to hire his cousin to serve as the company’s CFO. Despite the underwriter concern,the sale of Crazy Eddie’s stock to the public was a tremendous success. And because of the high demand, the company’s underwriter obtained permission from the SEC to sell 200,000 more shares than originally planned.
As a result of the high demand the price of Crazy Eddie’s stock increased rapidly. Many investors who pur- chased the company’s stock in the ! PO realized a 1,000percent increase in the value of their investments. However, as time passed the and the enviorment changed, the company was in deep trouble. The competition in the market increased significantly and reduced antars ability to receive special deals from suppliers which resulted in smaller profits for the company.
Additionally the growth rate decreased significantly compared to the previous years and led antar, in attempt to keep posting impressive operating results to maintain the upward trend in the stock’s price to perform many fraudulent actions that were discovered later: Since the company went public, antar ordered is employees to consistently overstate inventory and understate accounts payable by millions of dollars; as instructed, Crazy Eddie employees overstated year-end inventory by including in it consigned merchandise, and preparing inventory count sheets for items that did not exist.
In order to understate accounts payable, the employees prepared fake debit memos and entered them in the company’s accounting records. Another fraudulent tactic Antar used to overstate inventory involved transshipping transactions between Crazy Eddie and many of its smaller competitors. Gross profit from the sales was written in the books with higher rates than really sold and the inventory was overstated by not crediting it for the full amount. Same-store sales were inflated for selected operating units, and inventory was over- stated with a corresponding increase in gross profit from sales.
Despite of antar’s attempts, between 1984and 1987, The company’s annual sales volume decreased significantly and In late 1986,Eddie Antar resigned from his position as company president, and simply dropped out of sight. In the absence of Antar, Crazy Eddie’s financial condition deteriorated quickly and a takeover group headed by two prominent financiers gained control of the company. The new owners discovered and exposed a $65 million shortage of inventory.
That inventory shortage, which was larger than the total profits the crazy eddie had reported since it went public in 1984, eventually led company into bankruptcy and sent the regulatory authorities in pursuit of Eddie Antar for an explanation RULLINGS: in January 1990 a federal judge ordered antar to send back$52 million that he have transferred to his foreign bank accounts in 1987 Anter was present for the first hearing but after it he became a fugitive and was caught only 2 years later on june 25, 1992 when an Israeli force arrested him while living in a small town near tel aviv posing to be an Israeli citizen.
After being extradited back to the US, antar was convicted in july 1993 on 17 counts of financial fraud including: racketeering, conspiracy and mail fraud. He was sentenced to 12. 5 years in federal prison and was forced to pay back $121 million to former stockholders and creditors. On april 1995 the decision was overturned and a new trial was announced based on the claim that the previous judge had been biased against eddie antar. In may 1996 the case ended in settlement.
Eddie antar was sentenced to 7 years in prison however he received credit for time he already spent in prison, and as a result he had to serve only 2 years To date. Authorities have recovered more than $150 million from the parties that profited from the fraud. Significance as far as auditing is concerned: For auditing crazy eddie sceneraio opened the eyes to many internal controls issues that if not addressed can result in significant fraudulent behavior and should act as a warning light for future engagement. Independence
the independence of the main hurdman was questionable, first he done extreme measures to keep crazy eddie satisfied in order to keep him as a client including charging him low audit fees in order to provide the company consulting services that will cover for the temporary loss. Additionally main hurdman developed the company’s inventory system therefore is objectivity in checking it is impaired. Due care Along the years, antar consistently hired is former auditors, this is also common today however the crazy eddie scenario shows the danger when formers auditors are hired in the company, mat
In order to look more reliable for the wider public, Antar dismissed Crazy Eddie’s first local accounting firm, before he took the company public. As a replacement, Antar hired Main Hurdman to serve as Crazy Eddie’s audit firm. Main Hurdman had a nationwide accounting practice with several prominent clients in the consumer electronics industry. In the mid-1980s Following the corporate takeover of Crazy Eddie in 1987,the new owners replaced Peat Marwick with Touche Ross. CASE 1. 8 . CRAZY EDDIE, INc. Main Hurdman charged Crazy Eddie comparatively modest fees for the company’s annual audits.
A leading critic of major accounting firms a lleged that Main Hurdman had “Iowballed” to obtain Crazy Eddie as an audit client, realizing that it could make up for any lost audit revenue by selling the company consulting services. ——– he audit them for a lower price in order to gain them as a client, and get revenue from them from another side through consulting services This same individual challenged Main Hurdman’s ability to objectively audit an inventory system that it had effectively developed.
Main Hurdman’s independence was also questioned because many of Crazy Eddie’s accountants were former members of that accounting firm. company that hires one or more of its former auditors can more easily conceal fraudulent activities during the course of subsequent audits Most of the criticism directed at Crazy Eddie’s auditors stemmed from their failure to uncover the huge overstatement of the company’s inventory and the material understatement of accounts payable The auditors were accused of “aiding and abetting” the fraud by failing to thoroughly investigate numerous suspicious circumstances they discovered.
For example when the auditors requested client documents, and were told that those documents had been lost or inadvertently destroyed. To the auditer’s defense, antar done many efforts to conceal the frauds; after determining which inventory sites the auditors would be visiting at year-end, Antar shipped sufficient inventory to those stores or warehouses to conceal any shortages. Likewise, antar workers systematically destroyed incriminating documents to conceal inventory shortages Main aspect of the Crazy Eddie scandal was the involvement of several key accounting employees in the various fraudulent schemes.
These parties included the director of the internal audit staff, the acting controller, and the director of accounts payable. Pastaudit failures demonstrate that a fraud involving the collusion of key accounting personnel is difficult for auditors to uncover. Crazy Eddie’s practice of hiring its former auditors is not unusual also today. Many accounting firms actually arrange such “placements” with audjt clients, and support the transfer of it employees to the client’s company from the belief that this will increase the chance of future cooperation between the 2 sides.