Kelly over at Telecommuting Truths read my post the other day where I mentioned we learned about fraud in my Auditing course and requested I elaborate on the Crazy Eddie fraud case. I am amazed at the dedication to fraud this family had. Over the course of 18 years they employed several techniques culminating into their demise.
Crazy Eddie’s was a chain of retail electronics stores on the northeast coast (New York, New Jersey, & Connecticut). Founded by Eddie Antar, his father, Sam Antar, and Ronnie Gindi, Crazy Eddie’s started out as a small family-owned and run business, growing quickly largely based on its unique commercials (see below). Sam E. Antar, cousin to Eddie, started with the company at age 14, gradually becoming its CFO. It is Sam who does most of the talking in the video we used in class.
Eager to avoid paying the income tax on the excessive profits, the family devised a scheme to skim money from the business. At the end of the day the money, cash, checks, and charges, would be taken to Sam (dad) for final count. A decision on the amount of cash sales to “skim” would be made, and the money , checks, and charges remaining would be deposited the next day. Since this was a family owned business, it was easy to discard any evidence by tossing register tapes. No tapes, no paper trail. Around 1978 the Crazy Eddie business did begin having audits, but the register tapes were never requested during this process.
In 1979, the family decided they wanted to go public. A decision was made to decrease the amount of skimming to increase profits, which in turn implied Crazy Eddie’s was growing at a faster rate than was true. Soon Eddie Antar decided to reinvest some of the skimmed profits back into Crazy Eddie’s. The money was transferred from Israel to Panama, then drafts were issued paid to Crazy Eddie’s. These drafts were then deposited with other income earned from the stores. To listen to Sam Antar (CFO), he is surprised the auditors did not catch this obvious discrepancy.
The downfall of the Crazy Eddie franchise was the introduction of a new management group. This group felt the franchise was profitable and would be more so if they removed the family issues of the company. This company took over, dismissed the family principles, and discovered the nightmare that was the Crazy Eddie franchise. Millions of dollars and many investors were hurt by this financial statement fraud.
There are three parts to fraud, referred to as the fraud triangle: Attitude, Opportunity, and Incentives/Pressures. All three parts of the fraud triangle are apparent in the Crazy Eddie scenario. The incentive was to avoid paying excessive income taxes. Opportunity was a lack of controls brought on by this being a family owned and run business. And the attitude of this being a family owned business, therefore it was their money anyway, would round out the fraud.
So, there you have it. Your lesson for the day. =) If you want to learn more about Crazy Eddie, then check out these sites:
I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.
John
http://www.hdtrue.com
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“I am amazed at the dedication to fraud this family had.”
We committed our crimes for fun and profit.
Sam E. Antar (former Crazy Eddie CFO and a convicted felon)
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“It was the amount of money taken coupled with the desire to go public that caused the downfall here [IMO].”
Correct. If we stayed with skimming and did not go public, we would still be in business as criminals.
“Honestly, the auditors here are equally to blame.”
The auditors were incompetent. They should be held responsible and should be blamed. However, incompetence is not the same as criminality.
“They did not require any actual substantial proof the numbers were correct.”
Correct.
“The question in class was “Would this type of fraud be possible under SOX?”
SOX is not strong enough. That said, most auditors are not adequately trained to effectively carry out their responsibilites. It is like sending people to war without proper body armour and inadequate weoponry.
“If everyone is in compliance, then no because this company would never have gone public.”
If we feared auditors, we would not have committed our crimes. However, even with effective auditors, there is always a criminal out there that thinks he can beat the system.
“Does that make me a cynic or a realist?”
You are being a realist However, if we had more cynics, there would be less crime.
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Many small (and some not so small), family-owned businesses do the same thing(s) Crazy Eddie’s did and never get caught. It was the amount of money taken coupled with the desire to go public that caused the downfall here [IMO]. This does not mean I condone what was done, but that I accept this happens and, to some degree, believe the tax issues can be self-defeating when someone is considering starting their own business leading to this type of temptation.
Honestly, the auditors here are equally to blame. They did not require any actual substantial proof the numbers were correct. The question in class was “Would this type of fraud be possible under SOX?” If everyone is in compliance, then no because this company would never have gone public. As a private company, I believe it could happen, and probably is happening. Does that make me a cynic or a realist?
Thank you so much for commenting on my post.
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