Here is the former CFO of Crazy Eddie talking about how he was able to maintain a large-scale fraud for years.
Now a public speaker on fraud, his advice is “Don’t trust, and always verify.”
As criminals we learned that the most effective way to commit our crimes was with a smile. In the Godfather movie Michael Corleone said, “Keep your friend close, but your enemies closer.”
As a criminal I followed Michael Corleone’s philosophy all too well. We corrupted our auditor’s professional skepticism by giving them extraordinarily rich consulting work in addition to their audit engagements. Today, at least under Sarbanes-Oxley accounting firms cannot engage in consulting work for the clients they audit.
Our auditors felt too comfortable with us as “good, respectable human beings with high integrity.” We would socialize with our auditors by having so-called “three martini lunches” and we would invite them to attend Antar family functions. They believed we were pillars in our community as we gave large amounts of money to charity and were involved in a number of good community causes.
If anyone has ever seen the movie “The Devil’s Advocate” starring Al Pacino they would know that the devil’s favorite sin in vanity. The white collar criminal is equivalent to the devil. We took advantage of the vanity of our auditors.
For example, during the fiscal year end inventory audits, we would climb over stacks of inventory that were piled 10 high and 3 deep and instead of telling the auditor there were 30 items of merchandise in stock we would tell them there was 100 items (10 high and 10 deep).
The different audit staff members in many locations simply never climbed up the stacks of inventory to see what was behind them. It was beneath their dignity to climb boxes and count inventory. After all, they were well dressed in nice suits. As white collar criminals we were all too happy to accommodate their self importance and desire not to get dirty.
When the auditors finally came to our offices to conduct field work we were all too accommodating of their desires. We knew that most of them were relatively young kids who thought their field work was boring. We engaged in a campaign of “obstruction by distraction.”
I instructed Crazy Eddie staff involved in the fraud to do anything to keep audit staff members from focusing on their work. They would talk about baseball, sex, or anything else in an effort to stop them from focusing on the work.
For example, if the auditors had ten weeks to complete an audit, they would be expected to complete about 10% of their field work each week. However, as a result of our “obstruction by distraction” campaign, for example, by the 8th of 10 weeks instead of having 80% of their field work completed they would have only about 25% of it done.
When people have to rush they make mistakes. They skimp over important issues such as red flags and they omit key important work in an effort to make up for lost time and complete their work. The auditors could not blame us for their lack of time. After all we were all too “accommodating” with them.
For the fiscal years 1986 and 1987 the auditors never completed key field work. For example, regarding fiscal year 1986 they failed to conduct proper sales cut-off testing and did not thoroughly review our cash balances.
Had they conducted the required field work for fiscal year 1986 they would have discovered over $1.5 million in fictitious sales. We took money that was previously skimmed from Crazy Eddie as a private company (1969-1984) from secret Antar family bank accounts in Israel and deposited them into the bank accounts of certain stores (included in the computation of comparable store sales) and counted them as sales.
Those deposits of previously skimmed funds were made after the fiscal year closed. Such deposits made after the fiscal year for sales made during the fiscal year would be considered as reconciling items on bank reconciliation. Had the auditors carefully examined our bank reconciliations they would have seen open deposits for drafts in round amounts of $25,000, $50,000, $75,000, and $100,000 for fictitious sales listed side by side with actual sales in amounts of, for example, $318.31, $26.29, $914.26, etc. They were in too much of a rush to complete the audit since they wasted too much time from our distractions.
During audit for the fiscal year 1987 audit the staff member whose job was to audit accounts payable had only 6 months audit experience and no accounts payable experience. He started his major field work on the accounts payable audit on April 27, 1987 – the same day Crazy Eddie’s auditors signed off on a “clean” audit opinion. He did not finished auditing accounts payable until about 3 weeks later. The auditors missed a phony debit memo fraud which reduced accounts payable from about $70 million to $50 million.
The auditors only ended up receiving 3 accounts payable confirmations from hundreds of Crazy Eddie’s vendors. Even those confirmations from vendors showed significant material differences between what we claimed we owed the vendors and what they claimed was the proper amounts owed to them. The auditors failed to adequately investigate those differences.[...]
As a person who used words to deceive and lie to others in the commission of my crimes I say you must judge people by their actions and not by their kind words. Too often we are moved by well meaning but empty words.
As a criminal I used well sounding words too exploit you in an effort to commit my crimes. I knew as good human beings you would feel compassion for me.
However, the white collar criminal uses your humanity such as compassion as a weakness to be exploited.
Tags: fraud