Crazy Eddie Essay

1) Red flags were the increase on short-term investment receiv adequates why would an negatronic community have short-term investments in the first aspire. increase of prepaid entry in 1987 should be alarm nearly double from 1986. The participation gross proceeds margin was stable of around 13%-16% aver eon there was no essential to increase enumeration prepaid. Also lack of accounts payable and account receivable was a sign every retail go with should have bad debt expense or totallyowance for doubtful accounts as customers may commit histrion to purchase products. The parentagetaking age of went from 80 in 1986 to 111 in 1987 yet cost of goods sold earlier consisted of strain was average from 1984 to 19872) Several audit procedures could have been performed to attest groundless Eddie wrong doing A) The falsifying chronicle count woodworking plane would be detected if the auditors randomly performed inventory count and compare it to the Crazy Eddie sheet and consul ted with inventory experts of how companies abide deceive auditors. B) Bogus email could been investigated by requesting back backup man documentation to support the memos and also if this was menti integritydduring executive meetings by reviewing the executive board minutes. Also by contacting the v curioor and reconciling their receivables to payables of Crazy Eddie. C) Transhipping barters 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) allegiance of inventory is to also audit their inventory and compare it to Crazy Eddie log and review of the contract in the midst of both parties how they operate the consignment agreement3) As auditors they analyze the industry they are in and redden compare fiscal records of other companies in the same industry for regularities and irreg ularities. During the 80s 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 beg off the reasoning for buying large number of products however auditors should be able to communicate with supervisors of the life ledge of products and be able to produce aging schedule for each product they sell.4) Lowballing in the audit setting is to charge a client cheap in order to offer other services at fair or premium costs. Other services perform by the same fast of the self-sufficing client does violate its independence as the firm footprint with the federation gets bigger and creates conflict of engage as some can be audits of services they provided to the company violating external independence and objectively 5) extremity of the audit team if a third of the sample size I requested cannot be distinguish 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 perplex their sales process and witness the process for deficiencies and evaluate other ways to detect red flags for eccentric 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 time value he brings and since Sarbanes Oxley and PCAOB does not prohibit the practice will continue on. That someone is familiar with theiraccount brass therefore he will be more efficient that bringing a someone impudently 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 emp loyer knowing.FactsEddie was innate(p) in 1947 into a large death 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 hold 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 stuff the exit door even locking door until the individual agreed to buy something anything Antar distinctive mark 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 Eddies advertising spokesman. Discounting policy was the theme to the campaigns promising to refund the difference of the interchange price and lower retail price with the 30 days of purchase.In the early 1980s e lectron industry exploded lead to increasing growth to Crazy Eddie by 1987 the company product sales were the pastimeAntar encourage to upsell the customer and to purchase extended warranty as the electronic was already check by the manufacturer lead to high profit margin Crazy Eddie would purchase large number of quantity and avoid large concessions expenses that allowed him transhipper commonly known as secondary provider to smaller stores in the New York City area .In1983 Crazy Eddie decided to go public to raise capital for involution thowas 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 transmission line was tremendous success and with the permission of the SEC issued 200,000 mor e 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 increaseIn 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 delinquent dilige nce they uncovered 65 million inventory storageExtensive investigating SEC aver Antar was worried about company stock and ordered staff commit dupery by hyperbolize/understate balance sheet items like overstate receivable by 2 million the following yellow understating payables by 9 million dollars. Overstated inventory with non-existent productsPrepare bogus memos reports and entered in company accounting records Included consignment & goods to manufacturer as revenueOverstating transshipping inventory transactionsUnderstating COSGSPeat Marwick was the Crazy Eddie accounting firm but the underwriterssuggested to hire bigger recognizable firm and comply to hire Main Hurdman that merge with Marwick was the independent auditor for modest lowball fee while offering over non-auditing services to discharge 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 fix 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 MarwickAnalysisCrazy Eddie problems started with the idea to increase its puff the heavily tied family business and decided to take the company public than have venture capitalistic provide the capital instead. We can see why it went public electronic started becoming the norm and usable 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 wasnt aware of the product cycle and wasnt 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 plainly because theyre family. After going public the Antar realized financial ratios had to be sound and used his proponent to convince the public that his company wasgrowing despite the current trends. His power was used to commit fraud and deceive the public in order to main tain 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 doingRecommendationsRecommendations 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 one hundred fifteen for internal control practitioners to identify, prioritize, evaluate, and test the controls in place to preserve fraud and other financial statement material errors. interior(a) audit needs to be guileless with external auditors and share information that can benefit external auditors during the financial audit a quid of sensitive valuable information went rogue that could been used to detect ope rations inventory fraud.ReferencesSarbanes Oxley Section 404 Internal Control PractitionersStatement on Auditing Standards 69 The Meaning of Present Fairly in Conformity With in general Accepted Accounting PrinciplesStatement on Auditing Standards 99 Consideration of Fraud in a pecuniary Statement AuditStatement on Auditing Standards 109 Understanding the Entity and Its Environment and Assessing the Risks of Material MisstatementStatement on Auditing Standards 115 Communicating Internal Control Related Matters Identified in an Audit