Nature of the fraud:

Crazy Eddie, was one of the popular chain of electronic store who was involved in an inventory
fraud. The store was running under the Antar family since 1960. In its initial stage the store
increased its chain and became popular for its unique prices for their products. However, during
1969-1987 the chain of store caught performing one of the largest inventory fraud in the
history. The nature of the fraud was that, the management of the store, started generating fake
cash sales and started paying their employees in cash. The reason for paying in cash is to avoid
payroll taxes. Moreover, after some time, they start selling their shares as IPO in order to
balance the frauds and to represent company’s value in more profitable state.
Who was effected by Fraud?
After getting public in 1984, many investors start investing into their market shares at $8 per
share. Moreover, after being successful in IPO they sold off their shares by leaving all the
employees and investors empty hands. With the fraud, investors, who invested in the
company’s market shares and the employees who were working there get affected. Because
investors, lost their investments and employees lost their jobs. This way hundreds of thousand
people get affected by the fraud.
How could this have been prevented?
Well, there were several factors, by which this could be prevented. First of all, while scaling up
the chain, the income tax department could have investigated the sources by which ther as an
immediate increase in their sales or revenue. Secondly, the revenue generated by IPO could also
have verified, in order to make sure the investors and company’s financial position is accurate.
Lastly, there should be external auditors, who will be responsible for verifying the recorded
inventories in the company’s financial statement. By keeping these prevention methods, the
fraud could have been prevented.

References
Pinder, J. B. (1993). Crazy Eddie Founder Guilty of Fraud. Retrieved from The New York Times:
https://www.nytimes.com/1993/07/21/business/crazy-eddie-founder-guilty-of-fraud.html

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