Different Types Of Fraud Which Eddie Antar And The Crazy Eddie Company Engaged In

2021-05-24 22:31:14
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Crazy Edie and Eddie Antar were involved in three types of profit skimming. They included accounting fraud, securities fraud and Conspiracy. The frauds can be divided into three phases according to the time they were committed. The first phase was between 1969 and 1979 where skimming and income under-reporting to evade tax was meant to introduce the company to public sale. The second phase was between 1980 and 1984 where skimming was gradually reduced in order to increase profit growth in preparing the company for the first public offering. The last phase was between 1984 and 1987 after the company became a public traded company (Whitecollarfraud.com. 2016). Frauds were done by overstating income so as to dump stock at inflated prices using a variety of fraudulent tricks.

It can be seen that at the Crazy Eddie company, fraud began at the inception of the company. The Antars management intentionally falsified their books of account in order to reduce or eliminate taxable income. In addition, the company paid employees off the books as well as skimmed more money regularly from the cash received at the shops. For instance, in every five dollars Crazy Eddie stated as income, one dollar was taken by the Antars. The money skimmed by the Antars was deposited in Israeli banks inn 1979 in hundred thousand dollars (Wells, 2003). It was estimated that the Antar family skimmed about three to four million dollars per year during the peak of their fraud activities. It was noted that in one of its offshores bank account, the family made over six million dollars deposit between 1980 and 1983.

In 1983, the Antars family found that it had become difficult to hide the large amounts of illicit dollars. To cover up the growing fraud, they decided to make the company a public entity. In addition, Eddie started an arrangement to skim less amount each year. Company first public offering was conducted in 1984 and shares were sold at 8 dollars and within two years, the stock was trading at 75 dollars per share (Whitecollarfraud.com. 2016). Eddie later recruited his cousin Sam who helped in fraud especially after he was named the chief finance officer in 1986. He had to show a 10 percent growth in sales and improve the practice of money laundering known as Panama Pump where Antars family money deposited in Israeli bank was transferred to Panama banks accounts. The names used to open the accounts were falsified and payments drafted to Crazzy Edie. The money was then used to inflate sales in store to increase revenues and reported profits. Assets were also over valued to increase reported profits (Whitecollarfraud.com. 2016).

After becoming a public company, the Antars and other companys employees inflated the amounts of inventory fraud so as to represent an increased profits as well as over value Crazy Eddie stock. At the company fiscal year that ended 1st March 1985, the company had fabricated inventories by three million dollars. In the fiscal year that followed the amount amplified to over $10 million (Whitecollarfraud.com. 2016).

In summary, the following frauds were committed.

Fraudulent valuation of assets where inventory assets were inflated to increase the reported profits.

Accounts payable cut-off fraud where accounts outstanding liabilities were decreased to surge reported profits. In addition there were reports on non-existing or exaggerated insurance claims to increase reported profits.

Debit memo fraud was practiced to claim fictitious acquisition discounts and trade payments to increase stated profits

Internal Controls Violated In By Eddie Antar And Crazy Eddie Company

Internal controls for small companies are always considered to be too expensive. For Crazy Eddie, there were substantive audit which did not rely on internal controls due to their poor control. It is not possible to conduct audit where internal controls are weak and in such case, there is need to evaluate of internal controls of a firm by an independent outside accountant to improve auditing. Crazy Eddie did not have a worthwhile system of internal controls to be auditable. There were various internal controls that were violated:

First it did not separate accounting duties. This involves splitting responsibilities for bookkeeping, reporting, auditing and deposits. When duties are separated, there exist less chances of a single employee committing fraudulent acts. However, this was not the case in the company where the family members were responsible for all financial records. This made it possible to control all fraudulent transactions as they had all the books of accounting and made the audit report. Second was lack of physical audits. In Crazy Eddie and Eddie Antar, there was no physical audits for hand-counting cash. In addition physical assets such as inventory and tools were not tracked in the accounting system (Kranacher, Riley & Wells, 2010). Such practices could have reveal well-hidden discrepancies in account balances. Third is documentation where financial transactions documents are standardized to make sure that they comply with the auditing report. These include internal requests on materials, invoices, travel expense report and inventory receipts. They help in maintaining a consist record keeping in a given time. In addition, they make it possible to review previous records when probing for the source of inconsistency in the report (Kranacher, Riley & Wells, 2010). Lack of documentation standardization at Crazy Eddie made it possible to overlook some items while others were misinterpreted.

At Eddie Crazy, there lacked trial balances for a double-entry accounting system which adds reliability that ensures that accounting books are clear. The company did not enter a trial balances which provides for a regular insight into the system condition to investigate and discover discrepancies in the earliest level as possible. Internal controls could have made sure that they practiced accounting reconciliations occasionally which could have exposed the un-matching balances in company accounting system and accounts balances held by suppliers, banks and credit customers (Wells, 2003). Lastly was failure to add a layer of obligations to accounting reports which could be used to prove transactions that have been examined and approved by appropriate consultants. This could have prevented unscrupulous accountant from making large fraudulent dealings with company funds as Eddie did.

Weakness that existed and internal controls that could have prevented the frauds

Internal controls are policies and procedures set to make sure that there is continued reliability on accounting systems. Accounting relies on accuracy and reliability as they help the management to make critical financial decision about the company, comply with the law, follow regulations and policies as well as make sure that the financial reports are free from fraud and errors. At Crazy Eddie company, there were various weaknesses that were overlooked.

The accounting firms of Crazy Eddie company did not have knowledge of what they needed to audit. On the other hand, they did not formulate the proper follow up strategies as they trusted the answers they received from the company. A high number of the auditors did not have enough education and training for the tasks they were assigned to. For instance, the accounting students were not trained to conduct field interviews which was the case in Crazy Eddie (Whitecollarfraud.com. 2016). They only had CPA license. The internal controls did not make sure that they controlled the company management which was a family business. As a result, the accounting officers used their knowledge on accounting practices to outsmart and mislead the auditors. In addition, they exploited human nature weakness of assumption as they did not suspect any wrong doing of the company (Wells, 2001).

The auditor thought that the company accountants could not committing a crime. This was a major setback in understanding their malpractices. For instance, the company internal controls had changed their off the books payroll to fully accredited payroll books before the first public offering. Although the auditors did notice many employees were paid only 5200 dollars per year but at this time they were being paid at least 52000 dollars per year they did not give much thought on the discrepancies (Whitecollarfraud.com. 2016). They simply recognized the explanation offered as the employee sacrifice and dedication for future investment growth in a growing public company (Wells, 2001). In 1987 the chief finance officer tampered with the disclosure concerning the handling of discounts on trade and allowances in order to fit the time. The auditor general did not perform accounting alteration adjustment as prerequisite by generally accepted accounting principles (GAAP). There were some lags by Wall Street analysts and the investing public who did not notice required accounting adjustment under GAAP (Marks, 2012).

Auditors Inexperience

The auditors assigned to work with Crazy Eddie did not have experience to handle the assignment given to them. For instance, in 1987, the accountants which audited for Crazy Eddies accounts had only six months of accounting experience. In addition they finished their payable after the audit was over. Although they found major discrepancies in the records provided, they did not investigate them during the audit (Wells, 2001). There was 40% understating in payables at Crazy Eddies accounts which they did not report.

Accounting Education

There is poor education relating to auditors review of internal controls. Auditors of Crazy Eddie were not adequately prepared for conducting the reviews. They were incompetent in relation to internal controls and fraud detection. This weakness should be corrected by general auditing course in college. Other factors should include incorporating some legislations such as Sarbanes Oxley into accounting students education and training. For future auditors in modern businesses, there is need to advocate on learning new issues such as internal controls, white collar fraud, accounting standards, securities laws and auditing techniques and standards (Romney, Steinbart, Zhang & Xu, 2006). Accounting graduate need to have criminology and criminal psychology courses in order to ask right queries and conduct ground interviews. Interview and criminology skills can help auditors to match or outsmart criminals who are involved in committing white collar fraud (Marks, 2012). AICPA can set a higher minimum training, education and skills standards for auditors who perform private company audits and evaluate the existing internal controls.

Preventing White Collar Fraud

Crazy Eddie fraud long enduring success can be associated to many factors such as Antar family criminal subversion or the incompetence of the auditors involved. Other factors that can be considered include compromise of auditor independence through the revenue they got from the company through fees charged (Zhang, Zhou & Zhou, 2007). Society will continue to face white collar crime and there needs to be better strategies to deter these crimes and face justice Companies should establish obstacles with strong internal controls where accounting professionals will have better level of training, education and skills which independent from their clients. Laws such as Sarbanes Oxley should also be implemented as improved corporate internal controls are not enough means of combating fraud on their own (Nocera, 2005).

Financial officers should institute Sarbanes-Oxley as it offers new opportunity to look at the company processes. Public companies also have a fiducial duty to their creditors and investors to est...

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