8Ed.sol1.08 - CASE 1.8 CRAZY EDDIE INC Synopsis Eddie Antar...

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CASE 1.8 CRAZY EDDIE, INC. Synopsis Eddie Antar opened his first retail consumer electronics store in 1969 near Coney Island in New York City. By 1987, Antar’s firm, Crazy Eddie, Inc., was a public company with annual sales exceeding $350 million. The rapid growth of the company’s revenues and profits after it went public in 1984 caused Crazy Eddie’s stock to be labeled as a “can’t miss” investment by prominent Wall Street financial analysts. Unfortunately, the rags-to-riches story of Eddie Antar unraveled in the late 1980s following a hostile takeover of Crazy Eddie, Inc. After assuming control of the company, the new owners discovered a massive overstatement of inventory that wiped out the cumulative profits reported by the company since it went public in 1984. Subsequent investigations by various regulatory authorities, including the SEC, resulted in numerous civil lawsuits and criminal indictments being filed against Antar and his former associates. Following the collapse of Crazy Eddie, Inc., in the late 1980s, regulatory authorities and the business press criticized the company’s auditors for failing to discover that the company’s financial statements had been grossly misstated. This case focuses on the accounting frauds allegedly perpetrated by Antar and his associates and the related auditing issues. Among the topics addressed by this case are the need for auditors to have a thorough understanding of their client’s industry and the importance of auditors maintaining a high level of skepticism when dealing with a client whose management has an aggressive, growth-oriented philosophy. This case also clearly demonstrates the need for auditors to consider weaknesses in a client’s internal controls when planning the nature, extent, and timing of year-end substantive tests. Crazy Eddie, Inc.—Key Facts 1. Most of Crazy Eddie’s top executives were relatives or close friends of Eddie Antar who lacked the appropriate qualifications for their positions. 2. The consumer electronics industry realized a dramatic increase in sales from 1981 through 1984, which prompted Eddie Antar to convert Crazy Eddie’s stores into consumer electronics supermarkets. 3. In 1984, Eddie Antar took Crazy Eddie public to raise capital needed to finance his company’s aggressive expansion program.
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Case 1.8 Crazy Eddie, Inc. 4. To help market Crazy Eddie’s stock, Antar dismissed the company’s small accounting firm and retained Main Hurdman, which later merged with Peat Marwick. 5. Antar ordered his subordinates to inflate inventory and understate accounts payable after the company went public in 1984 to enhance Crazy Eddie’s operating results and maintain the company’s stock price at a high level. 6.
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8Ed.sol1.08 - CASE 1.8 CRAZY EDDIE INC Synopsis Eddie Antar...

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