1) Red flags were the increase on short-term investment receivables why would an electronic company have short-term investments in the first place. Increase of prepaid inventory in 1987 should be alarm nearly double from 1986. The company gross profit margin was stable of around 13%-16% average there was no need to increase inventory prepaid. Also lack of accounts payable and account receivable was a sign every retail company should have bad debt expense or allowance for doubtful accounts as customers may commit fraud to purchase products. The inventory age of went from 80 in 1986 to 111 in 1987 yet cost of goods sold primarily consisted of inventory was average from 1984 to 1987
2) Several audit procedures could have been performed to attest Crazy Eddie wrong doing A) The falsifying inventory count sheet would be detected if the auditors randomly performed inventory count and compare it to the Crazy Eddie sheet and consulted with inventory experts of how companies can deceive auditors. B) Bogus email could been investigated by requesting back support documentation to support the memos and also if this was mentioned during executive meetings by reviewing the executive board minutes. Also by contacting the vendor and reconciling their receivables to payables of Crazy Eddie. C) Transhipping sales would have been by reviewing account receivable process from start to finish. Review payment of the sale invoices and checking shipping department log of when transshipment was done and of course contact the buyer to authenticate the sale to place. D) Consignment of inventory is to also audit their inventory and compare it to Crazy Eddie log and review of the contract between both parties how they operate the consignment agreement
3) As auditors they analyze the industry they are in and even compare financial records of other companies in the same industry for regularities and irregularities. During the 80’s it was evident that the electronic industry was declining and ever changing leaving certain products to being obsolete. Transhipping made it difficult, as they were able and justify the reasoning for buying large number of products however auditors should be able to communicate with supervisors of the life shelf of products and be able to produce aging schedule for each product they sell.
4) Lowballing in the audit context is to charge a client cheap in order to offer other services at fair or premium costs. Other services perform by the same firm of the independent client does violate its independence as the firm footprint with the company gets bigger and creates conflict of interest as some can be audits of services they provided to the company violating external independence and objectively 5) Member of the audit team if a third of the sample size I requested cannot be find I would suspicious and question if the sale even took place. Also means that I will need to select more sales with that time period to see if more exceptions appear. Also I would receive their sales process and witness the process for deficiencies and evaluate other ways to detect red flags for example selecting sales from shipping department or warehouse department for possible red flags as well.
6) I believe its common for audit members to join clients team as management already know the value he brings and since Sarbanes Oxley and PCAOB does not prohibit the practice will continue on. That person is familiar with their
accounting system therefore he will be more efficient that bringing a person new also the relationship with audit firm can be strengthen and less problematic having that person as an liaison during the audit period. The cons are the negative light and question the independence of the audit firm. The person may have extensive knowledge how to deceive and commit unethical transactions without his former employer knowing.
Eddie was born in 1947 into a large close Syrian family. and dropped out of high school at the age of 16 years old and peddled television in Brooklyn neighborhood. By 1969 Antar and one of his cousins have funds to open consumer electronic store called Crazy Eddie. Crazy Eddie was nickname given to Antar through his behavior towards customers, vendors, and subordinates. For example Antar would block the exit door even locking door until the individual agreed to buy something anything Antar distinctive trait was the inability to trust anyone outside his big family circle and mostly relatives hold company positions in all capacity.
Crazy Eddie was know for marketing advertising antics in 1972 Antar hired radio personality know as Dr. Jerry as Crazy Eddie’s advertising spokesman. Discounting policy was the theme to the campaigns promising to refund the difference of the selling price and lower retail price with the 30 days of purchase.
In the early 1980’s electron industry exploded lead to increasing growth to Crazy Eddie by 1987 the company product sales were the following
Antar encourage to upsell the customer and to purchase extended warranty as the electronic was already insured by the manufacturer lead to high profit margin Crazy Eddie would purchase large amount of quantity and avoid large concessions expenses that allowed him ‘’transhipper ‘’ commonly known as secondary supplier to smaller stores in the New York City area .
In1983 Crazy Eddie decided to go public to raise capital for expansion but was delayed over year for the IPO as underwriter discovered several discrepancies of the company financial records and relatives role in the business key example his wife and mother received 6 figure salaries for little or no work. Recommended Antar to hire CFO with public company experience and hired his cousin Sam Antar as his CFO. The sale of stock was tremendous success and with the permission of the SEC issued 200,000 more stock. One way to sway financial analyst for positive reviews was to invite them to his store and show his salesman skills to close sales . One analyst wrote ‘’Crazy is a self disciplined competently organized firm with a sophisticated management and a well trained, dedicated staff’’ Based on the 1984-1987 financial statement and rave financial reviews investors from the IPO realized 1,000 percent increase
In 1986 Antar resigned from the company but remained chairperson member but after a few weeks he completely withdrew from the company. By 1987 the end of the electronic bubble, increased local competition, diminished supplier leverage, and family issues most notably bitter divorce as a result family members picking sides were the indication of the Crazy Eddie downfall. Mismanagement of the company and poor financial reports plummeted the stock as regulatory officials started investigating. November 1987 the company was taken over by two individuals while performing due diligence they uncovered 65 million inventory storage
Extensive investigating SEC alleged Antar was worried about company stock and ordered staff commit fraud by overstate/understate balance sheet items like overstate receivable by 2 million the following yellow understating payables by 9 million dollars. Overstated inventory with non-existent products
Prepare bogus memos reports and entered in company accounting records Included consignment & goods to manufacturer as revenue
Overstating transshipping inventory transactions
Peat Marwick was the Crazy Eddie accounting firm but the underwriters suggested to hire bigger recognizable firm and comply to hire Main Hurdman that merged with Marwick was the independent auditor for modest ‘’lowball’’ fee while offering over non-auditing services to make up the difference. Hurdman charged Crazy Eddie 85 thousand for auditing service while charging millions to do their computer inventory systems. Questioning Hurdman independence and objectively as Crazy Eddie accountant were former Hurdman staff. Hurdman defense was Antar would properly stock year end inventory to hide any shortages and systematically conceal documentations of shortages and to junk their computer operated inventory system and return to manual system making difficult to determine actual ending inventory at time period the entire accounting department participating in the collusion to throw off auditors.
In 1989 Crazy Eddie lost line of credit and filed for Chapter 11 bankruptcy Antar was arrested with 17 counts of financial fraud in 1993 and publicly admitted to defrauding investors by manipulating accounting records in May of 1996. Lawsuit was settled in 1993 in the amount of 42 million to various defendants including Peat Marwick
Crazy Eddie problems started with the idea to increase its expand the heavily tied family business and decided to take the company public than have venture capitalist provide the capital instead. We can see why it went public electronic started becoming the norm and disposable income complimented the fast growing industry. Crazy Eddie had the advantage similar to Wal-Mart being able to purchase large quantities at a low rate and taking a step forward to being second supplier to small business. Crazy Eddie failed to acknowledge or wasn’t aware of the product cycle and wasn’t able to forecast of where the industry was headed nor did it know the life of technology it was buying would not outpace demand.
Management at Crazy Eddie raised concerns regarding experience and education to make sound decisions to operating and financing structure the company needed also family had to be problem as some relatives received a salary just because they’re family. After going public the Antar realized financial ratios had to be sound and used his power to convince the public that his company was growing despite the current trends. His power was used to commit fraud and deceive the public in order to maintain the stock price like Enron would do a decade later and had the support of the entire accounting finance decision as no one reported to the SEC of their wrong doing
Recommendations for Crazy Eddie are to have the right management in place from executives to senior positions. Individuals that understand the industry trends and operate as efficiently possible. Finance department needed not only strong accounting department but an even stronger internal audit department that can properly perform Sarbanes Oxley section 404, SAS 69, SAS 99, SAS 109, SAS 115 for internal control practitioners to identify, prioritize, evaluate, and test the controls in place to prevent fraud and other financial statement material errors. Internal audit needs to be candid with external auditors and share information that can benefit external auditors during the financial audit a lot of sensitive valuable information went rogue that could been used to detect operations inventory fraud.
Sarbanes Oxley Section 404 Internal Control Practitioners
Statement on Auditing Standards 69 The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles
Statement on Auditing Standards 99 Consideration of Fraud in a Financial Statement Audit
Statement on Auditing Standards 109 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement
Statement on Auditing Standards 115 Communicating Internal Control Related Matters Identified in an Audit