Report on Financial Statement Fraud Scheme (Other (Not Listed) Sample)

Instructions:

Write a letter or memo in no more than 1,000 words to the organization’s management and communicate the examination findings explained in the case. o Identifies a fraud scheme o Communicates the examination findings explained in the case to the organization’s management o Includes a letter or memo that contains: • A summary of the matter under investigation • The scope of the examination • A summary of conclusions • The factors that aided the examination • The limitations on the examination including tables and graphs, headings, title page, and reference page See Attachment...

Case Study: That Way Lies Madness

Several names and details have been changed to preserve anonymity.

“I’m Crazy Eddie!” a goggleeyed man screams from the television set, pulling at his face with his hands. “My prices are insane!” Eddie Antar got into the electronics business in 1969, with a modest store called Sight and Sound. Less than twenty years later, he had become Crazy Eddie, a millionaire many times over and an international fugitive from justice. He was shrewd, daring, and selfserving; he was obsessive and greedy. But he was hardly insane. A U.S. Attorney said, “He was not Crazy Eddie. He was Crooked Eddie.”

The man on the screen wasn’t Eddie at all. The face so dutifully watched throughout New Jersey, New York, and Connecticut—that was an actor, hired to do a humiliating but effective characterization. The real Eddie Antar was not the kind of man to yell and rend his clothes. He was busy making money, and he was making a lot of illegally. By the time his electronics empire folded, Antar and members of his family had distinguished themselves with a fraud of massive proportions, reaping more than $120 million. A senior official at the Securities and Exchange Commission (SEC) quipped, “This may not be the biggest stock fraud of all time, but for outrageousness it is going to be very hard to beat.” The SEC was joined by the FBI, the Postal Inspection Service, and the U.S. Attorney in tracking Eddie down. They were able to show a multipronged fraud in which Antar:

Listed smuggled money from foreign banks as sales
Made false entries to accounts payable
Overstated Crazy Eddie, Inc.’s inventory by breaking into and altering audit records
Took credit for merchandise as “returned” while also counting it as inventory
“Shared” inventory from one store to boost other stores’ audit counts
Arranged for vendors to ship merchandise and defer the billing, besides claiming discounts and advertising credits
Sold large lots of merchandise to wholesalers, then spread the money to individual stores as retail receipts

It was a long list, and a profitable one for Eddie Antar and the inner circle of his family. The seven action items were designed to make Crazy Eddie’s look like it was booming. In fact, it was. It was the single biggest retailer of stereos and televisions in the New York metropolitan area, with a dominant and seemingly impregnable share of the market. But that wasn’t enough for Eddie. He took the chain public, and then made some real money. Shares that initially sold at $8 each later peaked at $80, thanks to the Antar team’s masterful tweaking of company accounts.

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Content:

Report on Financial Statement Fraud Scheme
Student:
Professor:
Course title:
Date:
MEMORANDUM
From: Anna Marie
To: Joy Adamson
Date: 28/11/2014
Subject: Report on Financial Statement Fraud Scheme
Dear Madam,
This memorandum is written for the purpose of communicating the examinations of the findings explained in the case that involve Eddie Antar, a fraudster who engaged in a financial statement fraud scheme for several years before eventually being found and prosecuted for his crime.
Summary of matter under investigations
The matter that is under investigation involves Eddie Antar who inflated stock price. He had an electronics empire, Crazy Eddie’s Inc. By the time Antar’s Crazy Eddie’s electronics company collapsed, Antar and his family members had distinguished themselves with a fraud of huge proportions, having garnered over $120 million. Eddie Antar over-reported his earnings and this increases the stock price of his company. In essence, he skimmed money to beat the taxman, and then drew out money as he needed them for the purpose of boosting sales figures.
The financial statement fraud schemes that Eddie Antar engaged include (i) overstated or fictitious revenue: this includes fictitious sales supported by phony invoices to genuine companies, invoices to fake companies, and no supporting invoices (Dutta, 2013). (ii) Skimming schemes: skimming is understood as the process through which funds is removed from the company before the money enters the entities accounting systems. It is an off-book scheme given that the receiving of the funds is never reported in any way to the business organization (Camay, 2009). (iii) Fraudulent inflation of inventory: this entails recording fictitious assets and overstating inventories (Association of Certified Fraud Examiners, 2014).
Scope of examination
Examination of overstated/fictitious revenues and skimming
It is pointed out in the case that for every few dollars to Crazy Eddie’s, Eddie Antar and his family members took a dollar for themselves. This money was then secreted away into bank accounts at the Bank of Leumi in Israel. In essence, Eddie Antar himself smuggled some of the cash out of the United States when he strapped stacks of substantial bills of cash on his body. This skimming of money actually meant tax-free profits. When Crazy Eddie’s entered the stock market, Eddie Antar anticipated the shares of the Initial Public Offering by secretly easing money from Bank Leumi of Israel into the company’s operation.
The problem with Crazy Eddie’s is that after the firm had built up the books, they established a pattern of double-digit growth that they actually needed to sustain. Since they wanted the company’s stock to rise, they came up with a 7-point plan. There was skimmed money waiting overseas which was brought back into the United States and then disguised as sales. Eddie and his family members illegally boosted retail sales by $2.2 million and income by $5.5 million and cashed in their stock for a windfall of $42.2 million. In the final year before the boom busted, they inflated retail sales by $18 million and income by $37.5 million.
Examination of fraudulent inflation of inventory
Eddie Antar and his family members also knew how to inflate inventory significantly. It is worth mentioning that debit memos were prepared that showed considerable quantities of VCRs and stereos as returned to manufacturer. Crazy Eddie’s Inc. was acclaimed for the wholesale cost due back from the manufacturer. Nonetheless, the machines were kept at the warehouse to be counted as inventory. Additionally, in a variation of the inventory scam, at least one wholesaler agreed to transport to Crazy Eddie truckloads of goods, putting off the billing to a later date. In this way, Crazy Eddie’s had substantial inventory volume.
Eddie Antar also shared inventory amongst his many stores. After auditors had finished to count the holdings of a warehouse and left for the day, employees tossed the goods into trucks and transported the inventory overnight to an early morning load-in at another store. The moment the auditors got at that particular warehouse, they actually found a packed storeroom that is ready to be counted. Another instance of fraudulent inventory fraud was when Crazy Eddie’s broke into the records of the auditors and boosted the inventor...

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Report on Financial Statement Fraud Scheme (Other (Not Listed) Sample)

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