Crazy Eddie Essay

1) Red flags were the increase on short-term investment receiv fits wherefore would an electronic comp some(prenominal) founder short-term investments in the first place. augment of prepaid catalogue in 1987 should be alarm nearly triple from 1986. The company gross profit margin was stable of around 13%-16% average there was no need to increase inventory prepaid. as well as lack of accounts payable and account receivable was a sign each retail company should have bad debt expense or security deposit for doubtful accounts as customers may afford humbug to purchase products. The inventory age of went from 80 in 1986 to 111 in 1987 yet cost of goods change primarily consisted of inventory was average from 1984 to 19872) Several size up procedures could have been performed to shew round the bend Eddie wrong doing A) The falsifying inventory count crumbvas would be detected if the auditors randomly performed inventory count and compare it to the disquieted Eddie sheet and consulted with inventory experts of how companies can mislead auditors. B) Bogus email could been investigated by requesting cover song expect documentation to support the memos and also if this was menti unitarydduring administrator meetings by reviewing the executive board minutes. withal by contacting the vendor and reconciling their receivables to payables of fruity Eddie. C) Tran cargo ships gross tax would have been by reviewing account receivable process from start to finish. look backward payment of the trade invoices and checking shipping department log of when transshipment was done and of stratum contact the buyer to authenticate the sale to place. D) Consignment of inventory is to also audit their inventory and compare it to nauseated Eddie log and review of the ingest between both parties how they lock the consignment agreement3) As auditors they die the industry they are in and even compare pecuniary records of some otherwise companies in the same industry for regularities and irregularities. During the 80s it was evident that the electronic industry was declining and ever changing leaving certain products to being obsolete. Transhipping do it difficult, as they were able and justify the reasoning for buying bulky function 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 potent of the independent client does violate its independency as the debauched stride with the company gets queen-sizedger and creates conflict of interest as some can be audits of services they provided to the company violating extraneous independence and objectively 5) constituent of the audit team if a third of the sample size I requested can non be find I would suspicious and question if the sale even took place. Also means that I will need to convey more than 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 app chevvy 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 instalments to join clients team as management already know the value he brings and since Sarbanes Oxley and PCAOB does not forbid the practice will continue on. That person is familiar with theiraccounting system therefore he will be more efficient that transport 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 unethic al transactions without his former employer knowing.FactsEddie 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 loony Eddie. barmy Eddie was nickname given to Antar through his behavior towards customers, vendors, and subordinates. For example Antar would period the exit door even locking door until the individual concord to buy something anything Antar distinctive trait was the inability to trust anyone outside his big family circle and approximatelyly relatives hold company positions in all capacity.Crazy Eddie was know for marketing advertising antics in 1972 Antar packd radio temper know as Dr. Jerry as Crazy Eddies advertising spokesman. Discounting policy was the theme to the campaigns promising to refund the difference of the selling price and frown retail price with the 3 0 days of purchase.In the early 1980s electron industry exploded lead to increasing growth to Crazy Eddie by 1987 the company product sales were the followingAntar encourage to upsell the customer and to purchase extended warranty as the electronic was already verify 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 normally known as secondary supplier to smaller stores in the peeled York City area .In1983 Crazy Eddie decided to go world to raise capital for expansion butwas delayed over year for the initial crack as underwriter discovered several discrepancies of the company financial records and relatives spot in the business key example his wife and mother genuine 6 figure salaries for little or no work. Recommended Antar to hire chief financial officer with public company experience and hired his cousin Sam Antar as his CFO. The sale of pains was tremendous success and with the permission of the SEC issued 200,000 more line of products. One way to sway financial analyst for positive reviews was to realise 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 found on the 1984-1987 financial statement and rave financial reviews investors from the IPO completed 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 cream 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 devil individuals while performing due diligence they uncovered 65 one cardinal million million inventory storageExtensive investigating SEC alleged Antar was confused about company stock and ordered staff commit fraud by inflate/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 unite 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 chargin g millions to do their computer inventory systems. doubting Hurdman independence and objectively as Crazy Eddie accountant were former Hurdman staff. Hurdman self-renunciation 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 rescue to manual system making difficult to determine actual conclusion 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 MarwickAnalysisCrazy Eddie problems started with the idea to increase its expand the intemperately tied family business an d 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 maturation industry. Crazy Eddie had the advantage similar to Wal-Mart being able to purchase large quantities at a low rate and taking a dance step forward to being second supplier to small business. Crazy Eddie failed to live 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 fostering 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 theyre family. After going public the Antar accomplished financial ratios had to be sound and used his power to convince the public that his compan y wasgrowing 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 doingRecommendationsRecommendations for Crazy Eddie are to have the responsibility management in place from executives to senior positions. Individuals that understand the industry trends and operate as efficiently possible. Finance department needed not altogether strong accounting department but an even stronger intragroup 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. inseparable audit needs to be candid with external auditors and share reading that can benefit external auditors durin g the financial audit a lot of sensitive valuable information went rogue that could been used to detect operations inventory fraud.ReferencesSarbanes Oxley Section 404 Internal Control Practitioners pedagogy on Auditing Standards 69 The Meaning of Present sensibly in Conformity With Generally Accepted Accounting Principles teaching on Auditing Standards 99 Consideration of Fraud in a Financial 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 identify in an Audit