Please read the article "Crazy Eddie" and respond to the following questions.

1. According to the article, how did Crazy Eddie fool young auditors?

2. Given what you know about the correlation between inventory and net income, why was Crazy Eddie trying to overstate ending inventory?

3. Was Penn & Horowitz really an independent audit firm? What compromised their independence from Crazy Eddie? What were the consequences?

4. What tactics did Eddie use to steal money?

5. According to the article, when did Eddie's scheme begin to unravel?

6. What is a white collar criminal, and according to Antar, why do they commit crimes?

7. Antar said that they had to fool the auditors in his time, while today it seems as if the accounting firms are co-conspirators. What does he mean by this and what examples does he give to prove his point?

8. What is the JOBS act and how does Antar feel about it?

9. What tips does Antar give to prevent fraud?

10. What advice does Jonathon Marks give to auditors?

Crazy Eddi article:

Crazy Eddies Cousin Sam Sees Greater Potential for Fraud

Michael Cohn, June 29, 2012

Source: http://www.accountingtoday.com/blogs/debits-credits/crazy-eddie-fraud-sam-antar-63175-1.html

Convicted fraudster Sam Antar, who acted as CFO for the electronics chain Crazy Eddie in the 1980s, told a group of accountants Friday that the potential for fraud has been growing worse in recent years, despite Sarbanes-Oxley.

Speaking at a fraud seminar Friday co-sponsored by the Center for Audit Quality, Financial Executives International, the Institute of Internal Auditors and the National Association of Corporate Directors, and coordinated by FEI, at the Crowe Horwath offices in New York, Antar screened old Crazy Eddie commercials, along with a clip from the movie Splash showing the ubiquitous commercials with the zany spokesman screaming, His prices are insane! Antar also screened a Court TV documentary explaining the fraud at Crazy Eddie, frequently pausing the program to give his perspective.

The electronics chain was able to fool young auditors by showing them inventory stock rooms filled with empty boxes of electronics gear, while distracting them with attractive female workers so they wouldnt bother to look at what was inside or behind the stacks of boxes. If the auditor was wearing a suit, they could be sure he wasnt going to get it dirty by moving the boxes.

Sam Antars cousin Eddie Antar was the mastermind behind the various schemes and hired his relatives to work at the electronics chain to help aid and abet the fraud. Eddie Antar paid for Sam to learn accounting so he could eventually work at the growing companys small auditing firm, Penn and Horowitz. Sam later became the companys CFO in 1986. Sam compared the family-run business to the Mafia. We were bound together by a culture of crime, he said. We were a team.

Eddie was skimming money from sales taxes that he only partially remitted to the government, while using part of the money to give steep discounts to customers. Much of the rest of the money he used to fund a partying lifestyle, while secreting a fortune at home and abroad. He also repackaged used and damaged electronics and resold them to customers as new. When electronics companies refused to supply him because he was selling the products to his customers below list price, he instead sourced the products from suppliers in other countries on the gray market.

When the company when public in 1984, the situation changed and he needed to focus on showing ever-greater revenues rather than lower revenues, as he did when the company was private. You get a bigger bang for the buck by overstating your profits by a million dollars as a public company and understating your profits by a million dollars as a private company, Sam Antar explained.

The company was making so much money that Eddie Antar was having trouble finding places to put it. He ran out of hiding places in his office and home, and eventually began traveling to Israel and Switzerland to stash the money in secret bank accounts. However, the scheme began to unravel when his wife found out he was cheating on her, and the family took sides in the dispute. Then, after a hostile takeover, the acquirer found out how overvalued Crazy Eddie really was and hired another outside auditor to look closely at the books. Eddie Antar fled the country and hid out in Israel, until he was eventually tracked down by authorities in 1992 and extradited back to the U.S. to face criminal charges.

Sam Antar said he had no problem with talking with the authorities in order to get a reduced sentence of six months of house arrest and $30,000 in fines. When I decided to cooperate, it wasnt because of remorse or because I found religion, he admitted.

He said prosecutors were willing to give him the plea deal because of the information he provided them. Eventually Eddie Antar also pleaded guilty to fraud charges and was sentenced to eight years in prison.

White collar criminals do it because they can, Sam Antar told the accountants and auditors in attendance. Its your job to make it harder for them.

But he believes the potential for fraud remains to this day, even in the aftermath of the Enron and Madoff scandals and reforms like Sarbanes-Oxley and the Dodd-Frank Act.

In my day we had to deceive our auditors, he said. We had to distract them. Today I feel like a dinosaur because we dont need to fool the auditors anymore. In many cases accounting firms are the enablers, if not the co-conspirators.

He pointed to examples like the financial restatements at Groupon and Overstock.com, which were both audited by Big Four firms. He has written about their accounting problems on his blog, White Collar Fraud.

Antar also criticized Congresss recently passed JOBS Act, which would lower many of the traditional auditing barriers and investor protection safeguards for so-called emerging growth companies seeking capital from investors.

I call it the License to Steal Act, said Antar. It would peel away the layers of compliance, peel away the internal controls and checks and balances. Why? To jumpstart the economy. The one interest group that gets full bipartisan support is white collar criminals. In the 25 years since Crazy Eddies, I dont see any improvement. I see things getting worse, despite your fine efforts, because whatever you doand youre great organizationsyouve got the politicians undercutting you.

He recommended that instead of having just the auditing firms signing the audit reports, the audit engagement partner should sign them. Antar also said he favors mandatory audit firm rotation, which is currently being considered by the Public Company Accounting Oversight Board. The one thing white collar criminals hate is uncertainty and surprise, he said. Over time we get to know our auditors. Even if you rotate the partners within the firm, the culture of that firm remains. Auditor rotation is a good thing. Is it perfect? No. Are there ways to improve the independence? Yes, but auditor rotation is important.

Jonathan Marks, a partner with Crowe Horwath who specializes in detecting fraud, gave advice to the attendees on the red flags they should watch for, such as unusually timed transactions, unusual amounts recorded, missing or altered documents, and conflicts of interest. He contended that the internal controls in Sarbanes-Oxley are too weak to deter or detect many types of fraud. People become situationally ethical, he noted.

Marks recommended that auditors start by walking around the offices of the companies they are auditing. Weve become too complacent sitting behind the desk, he said. We hide behind email and smart phones. Theres a lot we can tell just by walking around.