cast Lto

Craz Eddie, Inc.

In 1969, Ed.lie Antar. a 2l-yearold high school dropoui trom Brooklyn, openerl a
consumer electrcJrrics store with 150 square teet of floof space in Ne$, yort City.L De-
spite this modest beginning, Antar would evcntualiy dofirinate the retajlconsumer
electronics mafket in the N€w York City metropoliran area. By 1982, Antar,s firm.
Crazy Eddie, Inc., had 43 retail outtets, sates e:{ceeding S3;0 mlltion. and outstand_
ing stock with a colleciive market value of g(j00 rnillion. Antar personally realized
more than $70 million from the sale of Crazv Eddie srock during his ren;re as the
company's chief executive.
A classic rags-to ichesstorl became a spectacularbusiness failure in the laLe 1980s
when Crazy Eddie collapsed follor,"'ing allegaiions ol extensive financial wrong.loinq
by Antar aDd his associates. Shortiy after a hostile takeover of the companv in No_
vember 1987, tlte Jirms new owners discovered that Crazy Eddie,s inventory was
overstated by more than $65 million. This jnvent.rrlr shortage hail b{jen concealed
fuom lhe public in registration staiements fi]ed rvith the SecLrfities ancl E:{change
Commjssion (SECI. Subsequent investigations b! regulatory authorities reveale{j tl;t
Eddie Aniar and hissubordinates had grosslv o\,erstated Crazy Eddie,s reportecl prof,
'r\ rhlougl o| irr -\rs F|.e.

Eddie AnlorThe Mon Behind the Legend

EddieAntar was born into a large, closely knjr Syfian tanily in l94Z Atter dropping
outof_high school at the age of 16, Antarbegan peddling retevision sets in his Bro;kly;
neighborhood. Within a few tears, Antar and onc ol his cousins scraperl together
enough cash to open an electronics store near Conev Islancl. ft was at thjs tinjlstore
tirat Antar acquired the nickname "Crazy Eddic. When il customer attempte.d to leave
the store empty-handed, Antar \-ould block rhe store!,.xjt, sometimes lockjngth€ door
uniil the individual agreed io buy sonelhing-arrvthing. To entice a reluctanicostomer
to make a purchas€. Antaf first determi ed which prodLrcL the customcr was consider,
ing and then lolrered the price untilthe customer flnally capittlated.
Antar became well known ill his n€ighborhood not onty lor his unusual salos tac-
tics but also forhis un.onventional, il llot asocial. behavior. A bod],bujlder and fitness
tid,i. Le,!pi, Jl \ . jm( ro wor. p\F,.:\",uS\ r,..rnp.ii"1.,, u,,, n,,, g
|,.ii
CFrnr"r'hei-,I.- d. H. ;c^ l
pcr, -,
Ju\Fd r. t -a Fr' p.,,t lprn. $ it r \d ico.s ..o
pelito|s, and subordinates. Antar's most distinctive irait u,as his inability to trust any-
one oLrtside of his large extended lamily. In lareryears, when he nee.led someone to
serve rn an executive capacily in his cofirpany, Antxf nearly always tapped a iilnrily
nember, althoLrgh the individual seldon had the appropriate tra:ning oi experience

I This case wa coauthorcd b,v Carol Knapp, Assistaol prdtessor at rhe U.iversir! dt Oklahotru.
?. Th€ iacls olthis.ase qer€ drawn lr.n nunerous arricles ard SEt entorccmenr rel€ases prblished
oler a petod of several yeaE Thc N..b Yath Tjnes and Th/r wol/ .!rre?r Joxr,,/ in parti.! tar ctoseL,
''lo^ J'\" ^o' rt-oq" ... d-. . .. r ., t, .,. .. i i
lr-.lodr., -port.,h,tdu. F-,., L,h, i 1.-o. .t t.,. .
and P lrurnran, 'Calculatc.i Madnesr: lhc Rise and Fhltot t.,u UAt",rntu,. C-,,,-,r,l0 -
yarh brsi
aess 5 June 1989. ?1,33. l har anicle pfoyjded muc| otrhe ba.kgnnhd inforDation regardnrs Ed.tie
Antar iichd.d in lhis case.
sEcrroN oNE llLr!PNr r[\srtt c.\!f!

t.sitx)lr. EvcrtLralh' r\rtnfs lalheI sister, t!\! bfolhels L ncle. Lrf.)thcf ir!law.
for th.,
ards.\elalcousnlsMr)Lrl.lassulrrfhr(Lershr|positioos$irh(faz)E.l.lie.rlrrlcrnofe
thar orie dozen othrr i.latires \{t)LLld hol.l $inor lOSitir)rrs s rtl tlrc trflr.

Crqzy Eddie's Formulo for Success

llr thc caih ll80s salcs in rhe corrslrrrrci €rlectrolrics irrdrrstr\' €xploded. dolLblitrg in
thefou11rafperiod frollr l!l8l tol98lalone AsthepLrblicsderndri(l t.rf electfon '
prodLrcts gr.\! rt an evef ifcreasing pncr. Aftar.olr\!rf .d his CraT] Eddie storcs
nrto corlsumef electfonirs supennaflicts. Anlar stockfd thu shell rs oi Oazy Eddi' s
fetail outhls $iih erery clfdfonic Eadsft he co !d firrd d rLd \fith as manl Lliifcrcrrl
rfands ol lhose products as f(rssiblc Br' 11187. the collrl)art teatLr('.1 sever I pnnlu'1
lincs. Followinq are tirose pfodlrlt lirrcs and theil !rr(]rnta!e c(nlflbutnirrs to
(lfaz\:
Eddir's 198t sales

Audio prod!.ls and syncms 75

Portabte and peEofaL €te.tron G 10
5

Mis.eLtaneo!5 ilerns jndudjfq mniotrcve5,

air.ondjtiof er, and snatt apptrance5 10
@1"
Antar encouragrf his salespcoph lo supplerlrurl .ia.h slorr's pfofits bl pr.ssrrring
(Lrsl(]nlers t(r Lu) c lended produ(l \!auarties. ['li]rr!. il rxrt rrr()sL, .l the rcpair costs
lhat (lraz-v Eddic pij.l under thfsc wa|anties wci.r feco\lrrfrl lr) the tonrfar! Iron
manulactlrrcfs llriL h.1.1 issllc(l il.lorv $afli(tiL;cs on tho l)ftrdu.ts As l rcsLrlt. tlre
.ompan! rcalizcd i l(10 perccr!l froht nrafgrrr r)rr rrl ch ot r1! sranalrtr f.\t'rr e.
As hjs firm qrew fapidL! dufirg lhe laie 1970s and eilrh 1!811s liegan ejr
^rrtrr
tfdctiJrg l.rfile frice ron(tssions ii|)lrr lris s ppliers llis abrlrt! to I)r'rchiNe 'rlc(ti')|lrc
!foducls in larqe quaJilities and rt cLrl-fate pritrs cnabled IiJli o betornc d lran
shiltef. of setorduf! s pplief of tlrese qoods to !malLeI {-rirrsL'mer elcrtn)nrcs fe
tailcrs in rhe \fw Y)rk ( it\ nfed. Allhouqh rlrarruta.lrrfers frr^!ned orr this pf.t.tice
af(l olten tlrreliurld 1o stop sclli'ig 11) hnr. \rrtlrl c.trtinurll\ increasld llir scale of
lris lnnshrppirg op.'faholr.
The ost irnportanl iiqrediert i|| Artafs r all(ctlng stlrtrg\ \!as largc-s(ale ad
\:ertisifg Antafcreatcd an a.h'ertisilg umbfella o\rrhis,r)rnlaJr)sfrincipal fclail
nrdrkcl lhal incllrd€d the denselr'!oprrlite.l afea $'jlhi|L a 150 Lnile fadius of Ne\\J
\'ofk fil\: Antar blairkfLed this leqiof \tlrh lalrcous. sometrr fs dnno!rrrg DrrI a rlavs
r" rrr r' I
Ir ll;2, i\ntar hir.:id a locrl fit(ll(] persollalill and Iiaft ljJne actor kfoNn as
Do.r.)r.Jerf) tosc^easCrlz) [ddies adlefiisirrg sl]ohesl!rfsr)n Olefthc l5 \'eafs
tha he LLrq cvc.l D().t{)r.lerr} hatr'ked prodrrcls l.f CIaT\ Eddie hc lchje\'ed a
higlicf lecrrilrition .|!orient arrl(]rrg lhe pLililic thaf l'l.l KLdr' the l(nri,ltrIIrf rni)oI
of No! Yofk Citl. Do.l.Llefn s scrics oi eaFlriefring relel isrof c.mnrercra s lJ Lal
nriilLrftdhrlnscreatrrlrg (lfaz! E,:ldlf-His prices iif. iirsal,:' LroLr!httheronrf;rr!
rallonaL notofict) \\hen thev wcrc pairdied Lv Daf Alil.l ri riri Slrta/d.ry r\iq/r/ /-nr!'.
araz)E.ldifs(lis.ountirgpd.\sefvedastli.to.althrrrrcofthecoI'pan!sar1
\eftisin!t cdrrpajgns. lhe conudn\ promisf,:tt. r.lLrnd tlrf dittelelrct brt\\qrn the
sellinq Irficf oi d prod rt dnd any l.w-"r prirf lof that slrrrr item that | . Lrsnrnef
iL!rr.l i\,ithir ilo cl4s rn rhe purtlllsc date. Deslritc llLe adl.rtising barfaqc inlcnde.i
 casr r.t0 CRAzr EDDtf, tNr.

to convince the public that Crazy Eddie was a deep-discountet the compaly,s priccs
on most products r!ere in lin€ wirh those of its maior competjLors. Customers;fawn
to Ctrzy Eddie crutlets by ddvertised specials were routirel! diverted by sales staff
to higher priced rnefchandise.

Crazy Eddie Goes Public

ln 1983. Antar decided ro scll stock
in Cfazy E.ldie ro raise capital to finance his ag-
ilressrve expansion prognm The underwriting firm retained by Antar dcla)€d Crazy
Eddies initial public olferiIlg (lpol for more than one yeaf a frer .liscor,eri;g that th;
company's Iinanrial records were in disa|ray. Among other problems uncovered by
the unclefwritcr were extcnsile related parLy traDsactjorls, intercst free loans to enr
ployees, and speculative iov€stments unretated to rhe companl,.s princjpal line
ol
busiress. The underwriting fi
Il was also disturbect to fin.t thar neart all ;f the conr_
panvs kel executives were members oi the Antar falnily. Certain ol these inclividu-
als, including Antar! $,ile and mother. were receivin! satari€s approaching $100,000
for little or no work.
To pfepare Ior the lPO, the undenvdter encourage.t Antar. Crazy Ed.lies rhaiman
of thc boaftl and presi.lelt. to clean up the companys accounting rccords and finan,
cial alfaifs. The under$rltef atso urged Anrar to hire a chief financial officcr (CFO)
who had experience with a public company and who.rvas not a memberol thc Antar
famil): The underwritef warncd Antar that investors woLrklquestion the competence
of Crazy Eddies executives lvho were his relatives. Despite the unclerwfit;rs con-
cern. Antar hired his 6rst cousin, San E. Antai to ser\e as Crazy Eddie,s CFO.
The sale of Crazy Eddir's stock to the pubtic was a trcrnendous slrccess. B€cause
the IPO $'as ovcrsubscribcd, the companyls undenr ter obtained permission ffom the
SEC to setl 200,000 more shares than originally plannerl. Foltowint thc public Otiering,
Antar lvorked hald to con\'ince the investmert contmunity, particularly financial an;-
llsts, thathis nrm was financiallystrong and $,etl managed. At er€n opportun il),. Antar
parnred a picture of continLred growlh and increased marketshafe for Crazy Edclie.
One tactic Antar used Lo convince financial analysts that the company had a ros!
futurc was to ilvite then to a store and demonstrate in person his uncalny abiliq/ t;
"closc"sales. Such tactics worked to perlection asanalystsfrom prorninent
investme nt
firlns feleased glo$hg feports regafding Crary Eddie,s managemcnt team and the
company s bright prospecLs One anatyst wrote_ .Crazy Edd ie is a disciplined. compe-
t€ntly o€anized firm with a sophisticated management ancl a welftrained, cjedicated
slaff."i Another analyst wrote that Antar is a ,brilliant merchant surrouncled by a
deeply d€dicatcd organization €ager to create an iInportant retail business..! Because
ofsuch retortsand conL ir rued stron g opefating resulis (as reflected by the conpany s
1984-1987 financial sLatcnents shown in Erhibit 1 ancl Exhibir 2), the pricc of Cra)1,
Eddie's stoc k skl'rocketed N,lanv investors who purchased the companl,,sstock in rne
IPO realized a 1,000 percent incr€ase in the vatue ol their i vestme;ts.

Crozy Eddie Goes...Busf

Despite Crazj' Eddie's impressive opefating results during the miLl,l980s:Lnd the iact
that the companv's stock \\,as one of the hottest iDvestrnenrs on Wall Stfeet, all lvas
not well within the firrJr. Bv lll86, the companl, lvas in d-.ep trouble. By th-. lattel

I J U farnenbaur 'Ho\rNtolnln|l$JoesarCraz,Lddi.Sa ni nraror.d E .rr .. th. $hI Sh c.l

.tn,,al l0jull l9E9.Al r\.1
I C BeLskvand P Furnan 'Ca.rrLated lvia.hcss: The Ris.ard FaltorCfazv Dddi.Anrar,, ardnr:s Arpr,
f.)l A,r,resi. i nnc t989.:6
 ltffi
SECIION ONE COI PR[I]ENSIV!]C^SES

CRAZY TDDIE, INC.

BAIANcE SH[tTS (000s omitted)
B^LANct SHrm;
' OF CRA/Y EDDIE March 1, 2,
li'larch March 3, I'lay 31,
1987 1986 1985 7944

Cash $ 9,341 5 t3,296 s22,?73 51,375

Shot-term rrvestments 72r,957 26,440
10,846 2,246 2.740 2,604
llerchandis€ inventones rag,Q12 59,464 26,543 23,343
10,639 2,363 645 5L4
Toiat curreit a$ets 267,467 101,609 52,207 21,836

3,156 1:58

?6,407 1,772 3,696 7,845

Cornruction in process 6,253 7,154
5,560 7,479 1,r49
I
6,596
$41q5s $ry $36,569

Cunent Lia biLities:

$ .w2? 5 51,723 s?3,418 $20,106
2,900
49,47r 2,?54 423
Ureamed revefue 3,641 3,696 1,713 164
5,593 71,r?6 4,733 6,078
'14,J99 33,441 29,912
Total current tiabitities 708,821

a,459 7,747 1,625 46

Cof vei.ibte subordinated
80,975
3,337 1,829 121

SiockhoLders' eqLritY:
280 50

Additiofat paid in capjtat 57,618 11,668 \?,294 574

R€tzined eanlng5 35,269 24,673 lr,429 5,600
Total stockhotded equity 93,260 12,62r 23,461 6,2?4
, Totat LiabiLities afd
stockhotders' equitY $294,858 $g!!1 $q44 $rye

part of that year. the boom days had ended for the conslrmer electronics illduslry
Although sales of consumer electronics were still increasing the ratc of growth had
taper€a ofl considerably as compared \!,'ith lhe dranatic gfowth ratcs realized by
lh; indlrstry during thc early lgSos AdditionallI the industfv had become satuftted
with retailers, paticulafly in major meirop.rlitan arcas such as New York Citv Crazy
Eddie's hdre base. lncrease.l competitim neant smaller profit margins for Crauy
Eddie and diminished Antafs abiiity to extract sweetheart deals irom his suppliers'
Besidcs the prublems poscd by the increasingly conpetiti\e consu mer electron rcs
industry, Crazy Ecidie faced a corPoratc meltdown in thc late 1980s The tipling of
the company's annual sales volume betwcen 198:l ard 1987 and the more complex
 EXH|S|T 2
CRAZY EODIE, INC,
INCoME STAIEMENTS (OOOS omitted) 1984-t:187 IN.oNlE

Yeartnded Year Ended Nine l'4onths cR^7r [t)o r

1,
Ilarch t4arch 2, Ended Ma(h 3, llay 31,
1947 1986 1985 1984
s352,523 $262,268 $136,319 \r37,285
eulE) (pa3ff) (M141) (1!!41)
80,268 6/,a91 32,898 30,:151
SetLins, qenerat

(61,341) (42,975) (20,508) 122,560)

7,103 3,2r4 1,2I7 746

-f4!) (820)
,,11{) - tJ4)
2I,497 27,3\2 13,163 1,975

(500) (e00) (600)

L1!4!t)
sg 111!4)
5le $i4
(6,734)
$
(1,2a2)
3.173

$.,18 \.24 5.18

re:ponsibilities.assocrate.t with nranagrng a pLrblic companv

imfosed an enormous
a.rJrrnrnfatr\'e rrxfdcrr ( Cfaz\ Eddje.s execurjvcs. Comptrcaring
nlattefs u,as the
il].:,l:ll;ulirll;,:'l'"::,:'::f,::::1il:ti:,':it,ii:":il:ii:,:';..,'ii::it:l
i^p : i-,
' i. ,-1.. , t. . .id", $ir ,, r r ..... ,.
- ,,4.,|' Li... '
..,n,t , t-rirr ", ;.". ,rprr-
",..,.."
.. .ll Jn j .,. -t {...1:r"i..(.t
.rt | ., r,, ,,... ,., . .. .,. ;
lI late 1986 Eddie Antaf resiqned as company presi.]ent
althoLrgh h. reta lled ttre
titlr of drairman ot lhe boarcl. A fc\v $ceks
titer t," ,r.pp"A,., ,f.igr" r,r ii,"
'.., u A r'. ..
-, , ..or, "ilnpfr ,. 1; t.\ .. r,,...dlr,:
.L,p.
'-\Lr:', i. ,..Lr,rpr i -".i
\l ,r'51..1.{: .r. ,. f.,i.. . ,.i p;,,unr r,t i,tr.,r,.\: ",..;
..r-.tr\.\-Irt | ,,8_ ,(...,_,..rr r.JJ-
orrni {l 1.n 1i ui r. i,r A, ...o,, \ p. .5' n | ."', t,k-
new owncrs Lrncor:ercd thc 965 ntillion shortage (d invc
torv allud!.1 nr car|cL l.hat
rn\'crtor." shodage. lrhj.h $,as tarqef rhan rhe crunutative pro6rs
repofle'] slllcc rt rverlt pUblic ir 1981. lvoutd e\€ntuaI) plunge
th,. conpanv hJ
Craz], E.t.tie into ba|k
r uptcv and send f-.g u laro f), au rhortjes
ir purcuiL ot S.lal" l;t*
1",:," f;pr",,",i,r,,."
Charges ol Accounting trregulorities
Erlcnsi\! in!$tigations oi Crazy Ed.1ie:s financrdl rccor.ts b).rh!
new ownefs and
reeulabiv aulhofittcs cUtorinat.,:t ir fraud chafges bcntg
file.l agairst Eddie _Antal
nndhisiormerir.isociilres.TheSUCa ececttharaiterCraa;t{ldie;nluublicirt!t81,
 SECTION ONE COM|REHENSIVE CASES

ilm'- Antar became preoccupied with the pdce of his compall}'! stock.Antaf realized that
Craz,v Eddie had to keep posting impressive operatirg resulls to maintain the upward
trend in the stocks price.An SEC investigation revealed that within the first six months
alterthe companywent public.Antar ordered asubordinate to overstate irventory by
$2 nillion, resulting in the firm s gross pront being overstated bv the sarne amolrnt
The iollowing yearAntar ofdered yearend inventory to be overstated by $9 million
and accounts payable io be unde$tated by $:l million.Court recofds clocumented
that Crazy Eddie enployees o\,€rstated year_end inventory by preparing inventory
count sheets jor items lhal did not exist.To understate accoults payable. emplo)€es
prepared bogus clcbil memos ffon vendors and entered them in the companys ac_

As thc economic loftunes of Crazy Eddie began to fade in the lalc 1980s,
Antar became more desperate in his efforts to €nhance the company s re-
ported rcvenues and proiits. He ordered company enployees to include in
inventory consigned mefchandise and goods being rct |ned to suppliers. An_
other fraudulent tactic Antar used to overstate inventorv involved transhipping
transactions, th.. large-volume tfansactions between Crazy Eddie and man]' of
its smaller competitors.
Antar knew that Iinancial analysls closely monitor the annual percentage
change in same-store" sales for retailers. A declin€ in this percentage is seen
as a negative indicatof ol a retailels future financial pertormance. As the con_
sumer electronics industfy became increasinSly crowded. the fevenues of Crazy
Eddie s individual stores began to Iall, although the firm's total revenlres contin-
ued to climb due to new stofes being opened each year. To remedy the drop in
same store sales, Antar instructed his employees to record selected tfanshipping
transactions as relailsales of individual slores. For instance, sLrppose that Crazy
Eddie sold 100 micro$'aves costi g $180 each to another retailer at a per unit
price of $200. The $20,000 in sales $,ould be recorded as retailsales lvith a nor
mal gross pfofit margin ol 30 to 50 percent-meaning lhat inventory u,ould not
be credited lor the total number ol microwaves actuallv sold. This pfactice killed
two birds $ith the proverbial stone. Same-stofe sales v/ere inflated lor selected
operating units, and inventory was overstated with a corfesponding increase in
gross pfoiit from sales.

Where Were fhe Audiiors?

.Whefe
were the auditors?" was a question posed repeatedly by investors, crcditors,
and other interested parties when the public lcarred ol the Crazy Eddie ffaud. Four
cliffer-.nt accounting firrns audited Cfazy Eddie's financial stalements over its turbu
lent history. Antar dilmissed Crazy Eddies first accountiDg finn, a iocal 6rm. before
he took the company public. l he underwriter that managed Crazv Ecldie's IPO urged
Antarto retain a more frestigious accou nting firm to increase the public.s confidence
in the company s financial statements. As a result, Antar retained N'{ain Hurdman
to serv€ as Crazy Eddie's audii firm. NIain Hurdman had a nationwide accou ting
pfactic€ with several prominent clients in the consumer electronics industry hr the
mid 1980s, Peat N4arwick became Crazy Eddies audit linn when it merged with Nlain
Hufdman. Following the corpofate takeover of Crary Eddie in 1987, the new o$'nels
replaced Pcat l\'larwjck with Touche Ross.
Much ol the criticism tfigqer€d by thc Crary Eddie scandal centered on MaiIl
Hlrrdman and its successor, Peat Marwick. Main Hurdfiran charged Cfazy Etldie
compafdtively modest fees ior the company's annual audits. A leading critic of major
accountirg firms alleged that l\'lain Hurdman had 'lowballed lo obtain Cfazy Eddi€
 cAsE r.r0 CRAzy EDD]|, INc. l3l
,l

as an audit clieni, realizing lhat it could makc up for anv lost audit revcnue bysellilg ,q
the company consulting services.
r! 9!e rear, l,,Iain Hurdtnan .hurged onty .:i85,A00 b .io u .rmptete au.tit d Crazl
Eddie a busnpss uith hundrcds af ',illians oldalhrs in rcpone.l reDenues,.lazens
at retall stores, and tuo large atlrehauses. At the L)ety xtmc tine that jltain Lludn nn
aas &arging the ba,goin basement ptue d 8E5,0A0 f.t suppasedt\ t:onductin! an
audit, its t:onsulting diDiston uas charging Oa.y Eddie ni ians afdo ot,t.)canpur
erize Ctuz! j:ddie s inLentory systetn.i
This same individual challenged N4ain Hurdnlan's ability ro objectiv€lt, au.tit a| in
ventory s),st€m that it had effectively deleloped. tiain HLrrdman's independence was
also question€d because ntany ol Crazy Eddies accountants were forrner members
ot thai accounting firm Critics chafge that a company that hires one or mofe of its
former auditors can more ealily conceal fralrdulent actjvities dlrring the course of
subsequent audits. That is. a fonneraudiior may help his or herne$' employef undeF
mrne subsequent audits. In fart, Crazy Eddies pfactice ol hiring its former auditors is
not unusual. Man!, accourting fifnls actually arrange such 'jrlacements rvith audit
clients.
You ua ld dtink that ifatl audikt uante.l t.' leoLe a pubtic ar.ountilg tirt, he or
she Ll)oul.l be discouraged hon gong to utotk for (lktnts rhef hud atldited. htstead,
just the oppasite is tru? Lt)ith big a.&untinE tutns en. oungie tlreir pe$onnet ta
nark tot clients in the appdrcnt belief thot it hetps.enent 1e (rc.ountant-clienl

Most of the criticism directed at Crazy Eddie s auditors sterJlrn€d lron th€ir fail
ure to uncov-ar the huge overstatemcnt of the c()mpany's inlcntofy and the mate
rial understatement of accounts palable. Third parties who tiled suit agajnst the
audjtors accused them of "aiding and abetting the fralrd by frljling to thoroughly
rnvestlgate numerous suspicious circumstances thel, discovered. Of partjcular
concern were several ropofted instances in which th€ audirors rcquested client
documents, only to be told that those documents had been lost or inadvertently

In Peat Marwick and N{ain Hurdrrans defense, Antar and his associates engaged
jn a large scale plan to dec€ive ihe auditors. tbr exarnpl€, after determinirg
which
rnventory sites ihe auditors woutd be visiting at yeaf,end. Aniar shipped sufficicnt
lnventory to those stores or warehouscs to conceal any shonaqes, Likewise. Cfazy
Eddie personnelsvstematically destroyed incriminating documents to conc-.at in-
venlory shoftages from the auditors. Antar also ordercd his employees to ,,junk the
sophisticated, computer based inventory system dcsigned by X,lain Hurdman ancl to
return to the outdated manual inventory system prcvirjusly used bythe conpany. The
absence oI a computer based inventory system made it much morc dilficult for the
auditors to detennine eracth how much ilventory the firm had at any point in time.
A particularly disturbing aspect of the Crazy Eddie scandat was the involve-
ment ot several key acconnting emplo,\'ees in the !arious fraudLllent schemes.
These parties includcd the director ol the iniernal audit siaff_ the acting control
ler. and the director of accounts payable. Past audit failures demonstrate that a
fraud involving th€ collusion oI key accounting pcrsonnel is ctifticutr for auctitors

N.l \lleiss. iAu{lrt.rs: BeWat(hdogs Nor Just Bean Counr.6. jr..xnrrs lbdq lj Nolembcr lg!3..11
6
 132 SECTTON ONF C(^ rRrtsl Nt \ | C1.Li
[J,
Ilr Jlrne 1989. Crazr.Eddie liled n Chaltcr 1l
Lrdrkfutrtcy petitidr after losing its line ot credit
LJ r, J' l- m| "r . l l ,r' ,
inq stores and li.tllidat,..l jls;lssets llJeanwhilc.
Eddie Antafrvas named as a dcf.ndant ill slr'cral
lawsLrits, irchrdinq a l.'irge civil suit filrd LI thc
SEC and a cfinnralirdicLmcntllled bj,- a U.S. dls
trict att.rrne\'. ln.ianLraN l1lll0 a fe.leral ju{lg.i of'
dered Altai to repatriate S52 million that he ha(l
hansferred t.) fofeiql bank accounts in 198;
The lollowilrq Inonth. le.lefal marshals began
seafching nrr Antar aiter he tajlecl to appciil
in ihe f-.deral c()Lrl. A jLrdge had schfdulcd d
heafing to f.]|ce Antar h..t.clnrnl tor tlic rrids
he had transfefred to overseas lrank il.coLrnL:.
Af tcr Antar surrcr,:lere.l to lederal marshals. th-.
i,t lqitt r rtrr , u 6rnt ridrpa'6 in
on his o$,rr recognizance. Follo\{inq rhis corrrt
app€arance, Antar became a fuqirjve Fof the
rrert hvo vea|s, Antaf eltlde.] fe.leral aullrofil*..
despite repofied sightings .n hj in Bfclrklln.
Jerusalenr. and SoLrth Anerica.
O. Jurc:15. 1992. Isfaeli police arfeste(l
E. Artar At th€ tirne. hewas livinq in asnall
ic
town olrtsi.te Tel,\'iv an.l posrrq as an Israeli
citizen, Da\.id.lacob Levi Cohen Or Decem-
bcf 1ll, 1991, Antafs aitornev arrounced lhaL
an e\tfadition aqreenenl had been rcachc.l
with the U.S. Depafhnent ol lLrsrice and israeli
duthorities. After being extradited Antaf $,as
con\ ictr.i ir Julv 199;l on l7 colrnts of hnancial
frdud ircllrding racketeef ine, c.mspiracy. an.l
rrail fraud. In Nlav 1991. a lederal judg-. sen-
tenced Altar t.r l2 l/2 yeafs in le.l-.fal pfisorl
dnd orclered hinr to pay resrihrti.D ot $l2l mjl-
li.nr to fomer stockholders and credilofs
\ " . ., ' ' u.rrl -r. rrp \ ''.
tfarr.l c.rn!j.1 on in Apfil 1:l:15. The appeals
c.rLrn rulcd that thc ju,:lqe who had presided
'' \r,Jr. ,i ,,'l \t .-l .,t r.lrrr
arirl ordcrcd that a ne\\, trial be hel.l Lrn(ler a
(liffcfcrit ludgc h \'lay 1996.,\ntar's attornevs
? F.\ l\1.[nrns. arn7jliLdL.l,, sA,]ln r, i
.l2indl 1l \l"r lqltl ili
8 San l ,\nt.rr '('raz! lldl i.5|.nks Cd5i, Sa
whiteroLluthra blogst.r.nint lsl r..21)0i
af d fcdcfdl pn)sfcutofs afi;rngcd a pl.a LiLF
gajn agiccmfJrt 1o seLlle Lhe clrafgcs o|lt
''.1'-.
agfccrrcrl, Artar plcaLlcd gujlt) to olrc fcdcfal
rhafge oi facliftc||i g dnd prblicl) adnrittell,
{or thc fi|St tufc. that h. had dcifaudcd irncs
tob bt' rraripulatirrg lris comldnvs accoLurtinq
r.r.ofds |.rll.N'in!j his adJllissir otquill, orir of
the pfose.rLriirg artofne\s com|nenre.l: CfarV
E(ldie l\,asn t .faz\. he r,vas oooked r
lf cafh 1997. F.ddie Antar \\,as senlence.l t.)
sclcn Icafs ir icdcfal prison. Antar. !\4ro hdd
frrrainc.i in custodv sincc l)cing rxtrdditcd to
thc Ihitc.i Statcs lri 19!:1. r(ci\cd crcdit {oflhe
ljnr€r Iic lrdd iilera.ll speril lr l)r;son As a icsLrlt.
tp\.-t - ...r - rl,.!-",,.
s-Aven -1'ea r senre r ce
Sevefal ot Anlar s tofmer cohorls ha\c al"-
b..n corr!ictrd of havc pl.adcd guiltv to frard
'lJr , I rl (.,rrr- \r'' r" Ll .
formri CIFO Aft(J bcing rcl.ras..d itu pfisor.
SaJn E Anlaf r)pcnh des.fib.d and discussrd
his r(ile in the lraLid masler|ninded bl hLs
. t,t trt-t rr.r cc .i.
college degree in ac.ouriing b-.(arse the laJn'
ilv fcelic.l an f\pefl accorrnlanL 1l) lrelu dcsign
managc. and conceal Lhe..rnpanv s f faudlrlclt
..1.. ,.. .::Jl' ,, .,.!",.... rll..",. il
. J ' t r | {-
'ur 'r .. .l':
pl l.l)on joininq (lraz\i E.ldie Sanl
lirsr irlLe
coniessed that he became a thuq ar.l a wlll-
irg farlicipanl ln rhe |nassi\',.lraud:
(-]o4 la.l.lit Insotlnttrr? btiilt(n *!.!it Thc
ttrt[xrt\'t! ds bllett tt) iL\ toft LtI]ie Anrt, ltis
Lt h..]: Ln )trrts. l rdheLi dt r r. n k, nr I ( tltus
t (
lon tt:rl Ltu: nut I.LL. ol tllis il.Ltsitt. cnruldl en.
k:tptisr ,1out &t.ur(o sidurcd tha hurnlrnn)
ot otht\s.ts tL.akrrtst:s tt) ft' (.\pbik!1it tiul
tthrls b tr|ntrit arn ttitLrs U/., slrrp^, gofe
iuLsttrs, tniinrs, u d nnry (usttn.ls a rou.
.l"xl \rt trrn' tnrhirlt hrt rokllvnted.tnd
sotrllcss trittirtl: l\i' u)ut tur)htthLEs.\
LsC!ill iL RrrLiete(fjn!i rrLspirr,r! fl! llnli/ra1
r F AriL.rFrlprrds llrli/!1i,1/dtnulr|11p/

CASE I.]O CR^ZY EDDIE,IN(.
In March 1993, an agreement \{as reached to
settle dozens ol p€nding civii lawsuits spawned
by the Crazy Eddie lraud. The contribLrtions ol
the various delendants to the $12 mi ion settte,
ment poolwere noi clisclosed; how€vet the de-
lendants contributing io that poc,l included peat
Marwick and the localaccounring firm used by
Cfazy Eddie b€fore the company went pubtic.
Law enlorcement authorities recovered more
than $150 miliion from th-. parties that profite.l
from the fraud. Those funds inctuded more
than $40 million that a fedefat judge ordered
Sam Antar, Eddie Antar's iather, to surrender rIl
August 2002
./
ia
'*i#
ln the late 1990s, Eddie Antar's mother pur
chased the Crazy Eddie logo and the compilny,s
iormer advertising catch phrase, "Crazy Eddi€_
His pfices are insanel" which had been sold rn
bankruptcy proceedings years earlier h 1998,
two nephews oi Eddie Antar revived their uncle's
b. \irraoc. T r. rel^ ,,d/,vLda_nt _rdpdffi ,.i
pall!, as a mail orderand lntcrnet-based retailefof
consumef electronics. In JLrne 2001. a Ne$ yofk
business publication feported that the compa!y
had hired a former executive in the conslrrler
6 e. | . riL5 rduc'rj o
ldr. d: rt , 1 rFati\6
iorce- b€hird its marketing efiots.eThat indivr.l
ualwas none otherthan CrazyEddie Antarr0

Quesfions
L Contpute key ratios and other financial measures forCrazy Eddie during the
period 1984-1987. Identify and briefly €nplain the red flags in Cfazy Eddie,s
fi nancial stat€ments thatsuggested the firm posed
a higGrrhan-nc,rrnal tevelof
alrdit dsk.
2. Identify specinc audit pfocedures that might have led to the detection ol the
following accounting irregutarities peruerrated by Crazy Edclie personneli (a) the
falsification of inventory count sheets, (b) the bogus debit memos foraccounts
payabie, (c) the recording of transhipping transactions as retailsales.
an{j (rl)
the inclusion ol consiqned mefchandise in y€aFend inlentory.
3. The rctailconsumer elcctronics industr).was undergoing rapid and dramatic
changes during the 1980s. Discuss how changes in u'n au"ait ctientt inau"t.f-
should allect audit planning decisions. Relate this discnssion to Craz), Eddie.
4. Explain what is implied by the term tootdlrrg in an au.ljt context. How can
this
practic€ potentially affect the quality of indepen.tent auditservices?
5. Assume that you u,cre a member ol the Crazy Eddie audit team in 1986. you
\4'ere assigned to test the client's yearend inventory cuioff pfocedufes. you
selected 30 invoices entered jn the accounting records nearyearend. l5 in
the lew days prior to the client's liscalyear-end. ancl 15 in the first Iew days of
the newyear. Assurne that clien! personnel lvere unable to locale 10 of these
jnvoices. How should you and yoursuperiors
have responded io thissituatio ?
Explain.
6. Should companics be allowed to hife inclividuals who formerly served as their
independent audito$? Discuss the pros and cons oi this pfactice.

9 $reekin Revieh. CrantJrv.rn york Buskes! IIJune2ol]t.il.

l0 lrr2004.thetre Crnzv Eddic tniled The.lnpary\ rrademaikssere purchased by aTeras
based fin!