Student Handout 6: Crazy Eddie Inventory & Cost of Goods Sold
Crazy Eddie, Inc. was a retail consumer electronics store in 1987, operating 43 retail
outlets in the New York City area, with $350 million in reported sales and reported
profits of $10.5 million. Its stock was a Wall Street "darling," with a collective market
value of $600 million. The only problem was that the company's reported profits had
been grossly overstated since 1984, the year that the company went public. Eddie Antar,
the company’s founder, and major shareholder became preoccupied with the price of his
company's shares in 1984. Antar realized that the company, in an extremely competitive
retail market in the largest city in the United States, had to keep posting impressive
operating profits to maintain the upward trend in the company's share price.
Within the first six months, Antar ordered a subordinate to double count about $2
million of inventory in the company's stores and warehouses resulting in overstating
profits by the same amount. Unfortunately, the company's auditors failed to detect the
inventory overstatement. The following year, emboldened by the audit error, Antar
ordered subordinates (now accomplices) to bump the overstatement to $9 million and to
destroy incriminating documents to conceal the inventory shortage. When auditors
asked for these documents, employees told them they were lost. Antar also ordered that
the company scrap its sophisticated computerized perpetual inventory system and return
to an outdated manual system that was easier to manipulate. The auditors made the
mistake of telling Antar which company stores and warehouses they were going to visit
to observe the year-end physical count of inventory. Antar shifted sufficient inventory to
those locations just before the counts to conceal the shortages. By 1988, when the fraud
was discovered, the inventory shortage (overstatement) was larger than the total profits
the Company had reported since it went public in 1984.
In June 1989, Crazy Eddie, Inc., filed for Chapter 11 bankruptcy protection. Later
that year, the company closed its stores and sold off its assets. Eddie Antar became a
fugitive from justice, moved to Israel, and took an assumed name. He was arrested in
1992, extradited to the US, and convicted on 17 counts of fraudulent financial reporting
in 1993. He was ordered to pay $121 million in restitution to former shareholders and
creditors. A series of missteps by the courts led to a plea bargain agreement in 1996, a
condition of which Antar admitted, for the first time, that he had defrauded investors by
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manipulating the company's accounting records. One of the prosecuting attorneys was
quoted as saying, “Crazy Eddie wasn’t crazy, just crooked.”
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