Some of the Biggest Crazy Eddie Audit Errors
Assuming a proper audit can be conducted in the absence of credible internal controls.
Under educated, under skilled, and under experienced audit staff.
Over using audits as training grounds for inexperienced audit staff.
Lack of investigative or forensic accounting skills by auditors.
Failure to ask proper questions.
Failure to know who to ask proper questions of.
Assuming the answers to good questions are correct.
Failure to ask follow up questions.
Failure to verify answers to questions.
Lack of professional skepticism.
Allowing company staff to distract auditors from doing filed work by engaging in social conversations, thereby wasting time during audits.
Failure to simultaneously observe inventory counts in all locations.
From 1984 to 1987, the auditors did not observe all store inventories or inventories at all locations.
Failure to take copies of full inventories taken when leaving the premises.
Failure to conduct proper test counts of inventories by relying on company staff to count boxes.
Allowing company staff to take possession of test counts to make copies on behalf of auditors.
Failure to follow through on analytical test issues.
Failure to conduct all required analytical testing.
Failure to conduct sales cut off testing at year end.
Failure to examine items listed as deposits in transit at year end.
Failure to age accounts payable.
Failure to conduct adequate verification of accounts payable balances.
Failure to contact vendors when major discrepancies were identified as vendors sent back verification requests.
Failure to secure audit work papers left on premises during the audit by leaving keys to trunks containing audit documents on company premises.
Allowing company personnel to view audit work papers in process.
Allowing company personnel to distract audit staff conducting the audit to slow them down and thereby have to rush their work in the end to meet the audit deadline.
Auditors signed off on financial reports to outside directors and allowed the issuance of financial statements before the fiscal year 1987 audit was completed and backed into the numbers.
Auditors made misrepresentations to the outside directors about certain questionable practices and directions from the outside directors to investigate them.
Auditors made misrepresentations to the SEC about directions from the audit committee to investigate questionable accounting practices.
The auditors failed to follow up on recommendations of Crazy Eddie’s outside counsel law firm Paul, Weiss, Rifkind to investigate irregularities concerning sales to a trans-shipper in 1987.
The auditors disagreed with recommendations by Crazy Eddie’s outside counsel law firm Paul, Weiss, Rifkind to provide more detailed disclosure on Crazy Eddie sales to trans-shippers and other issues.
Some Crazy Eddie Red Flags
The tight knit Antar family ruling Crazy Eddie had virtual absolute control over all aspects of the business.
Crazy Eddie had very poor internal controls.
Crazy Eddie management had virtually unchecked override of internal controls.
Very poor audit trails and documentation.
Major self-dealing transactions and related party transactions by family members.
Substantial increases in wages from below market wages before the company went public.
In 1985, an attempt was made to falsify certain store inventories which was uncovered by the auditors. The auditors accepted an excuse that it was not sanctioned by management and our explanation that a vindictive employee must have changed the numbers.
Substantial increases in gross margins, profits, inventories, debit memos etc. from prior periods for no logical reason.
Significant volume of outstanding deposits in transit at fiscal year end.
Individual deposits in transit extremely high in relation to normal amounts at fiscal year end.
Unusually high inventory volumes in stores where physical counts were not observed by outside auditors.
Inventories in many individual stores were in excess of space capacity.
Major differences between amounts confirmed from vendors for accounts payable and amounts reported on Crazy Eddie's books and records.
Use of "gross margin method" to value inventories during interim periods instead of taking interim inventory counts.
Change of accounting methods for purchase discounts and trade allowances in 1987 from cash basis to accrual basis noted in footnotes with no accounting adjustments.
Small CPA firm that conducted Crazy Eddie audits before (then big eight firm took over audits) had a significant revenue base from Crazy Eddie.
Controller and later CFO for Crazy Eddie (Sam E. Antar) worked for small CPA firm that audited Crazy Eddie books.
Insiders were unloading major amounts of their stock holdings.
Crazy Eddie Auditors:
1976 to 1983: Penn & Horowitz (Small Firm).
1984 to 1986: Main Hurdman (Ninth Largest Accounting Firm at that Time).
1987: Peat Marwick (Main Hurdman had merged with Peat Marwick - part of the "Big Eight" accounting firms). Today Peat Marwick is part of KPMG (It is part of the "Big Four" accounting firms).
