The key events surrounding the case
Crazy Eddie Inc was a consumer electronics merchant founded in 1969 by Eddie Antar. The company soon expanded and opened various stores around New York City. Its success was accredited to Antar’s crooked salesmanship in forcing consumers to purchase, discounts from its bulk purchases, and aggressive marketing.
Within a short time, it became a household name and decided to go public. Its financial records were not in order which the underwriter rectified including recommendations that Crazy Eddie adopts new executive officials as most were Antar’s close relatives. Its popularity saw an oversubscription of the initial public offer but problems started to emerge when it became more concerned with the share price that it resorted to manipulating its financial statements. The inventories were overstated and account payable was understated to attract investors.
But with the saturation of the electronic market, the company’s profitability slowed and Antar directed employees to inflate the store earnings to influence audit reports. However, the downward trend continued until Crazy Eddie underwent a hostile takeover. The new owners on conducting audits realized the inventories had been grossly overstated leading to its bankruptcy and arrest of Antar.
Crazy Eddie audit firm, Main Hurdman, was held accountable for failing to objectively perform its audit duties. Furthermore, it received less than a substantial amount for audit which compensated for millions in professional services it offered Crazy Eddie to computerize its inventory process. Issues were however raised for it also conducted audits for this process it had developed. In addition, Crazy Eddie accountants were former employees of Main Hurdman which could have influenced audit reports.
In its defense, the audit firm claimed that the company had erroneously altered its financial information before audits in addition to collusion by top officials that pose difficulties in conducting audits.
The key auditing topics
From the above case, we can identify several issues related to auditing. First, the audit firm’s independence has been threatened. In addition to the audit services it offered its client, the firm also undertook professional services. This presented a clash of interest when its employees still had to audit a process they had helped implement in the firm. It could prove difficult for them to come up with a fair report on its functioning. Furthermore, the company also breached the law as some of its employees soon started working for the clients. The law requires that such employees should not work for a company they undertook audits for until the expiry of a year. Apart from the independence, its ethical conduct is also in question as it neglected its responsibility as an audit firm and was merely pursuing its interests.
The audit firm also breached the legal liabilities they had on parties that could have relied on its reports in dealing with the firm. They failed to conduct audits with objectivity as they were not able to realize the malpractices that were occurring in the firm. The investors that relied on its reports ended up losing substantial amounts of the wealth when it was later found that inventories had been overstated whereas the account payable was understated.
The case has also presented the challenges facing audit firms in the process of undertaking their tasks. The client’s executive officials colluded in hiding crucial information from the firm making it hard to identify anomalies in the financial statements and even went as far as sabotaging the inventory system to aid them in their fraudulent practices.