Were Groupon’s and Overstock’s Management and Auditors Stupid or Did They Condone Improper Accounting Practices?

Back on August 24, 2011, accounting professors J. Edward Ketz and Anthony H. Catanach Jr., reported in their blog that Groupon (planned ticker symbol: GRPN) violated Generally Accepted Accounting Principles (GAAP) in reporting its revenues and recommended that it restate its financial reports to correct its error. They sent a complaint to the Securities and Exchange Commission Whistleblower Office. Last week, Groupon restated its financial reports to comply with revenue accounting rules as called for by Ketz and Catanach. The company revised its reported 2009 revenues from $30.5 million to $14.5 million and its 2010 revenues from $713.4 million to $312.9 million – no small potatoes!

Why did Groupon’s CFO and its auditors at Ernst and Young (the third largest accounting firm in the world) miss revenue accounting violations? Ketz and Catanach did not have access to company management or its books and records. They found GAAP violations from merely reading financial reports filed with the S.E.C. in anticipation of the company’s initial public offering. They compared the company’s revenue accounting disclosures with applicable accounting rules and found material misstatements in violation of GAAP. Were Groupon’s management and its auditors stupid? Shouldn’t they know revenue accounting rules? In a blog post this evening, noted forensic accountant and author Tracy Coenen suggests that Groupon used higher and improper revenue numbers to mask troubling trends in its business model.

Over the last several years, my blog exposed a pattern of accounting shenanigans which helped Overstock.com (NASDAQ: OSTK) (also known as O.co) materially overstate its reported earnings. From Q2 2007 to Q2 2008, the company used improper EBITDA calculations to materially inflate its financial performance in violation of S.E.C. Regulation G. For example, in Q2 2008 Overstock.com reported a positive $1.117 million EBITDA using its improper calculation instead of a negative $0.430 million EBITDA had it complied with Regulation G. From Q4 2008 to Q3 2009, Overstock.com violated Generally Accepted Accounting Principles (GAAP) and materially inflated its reported earnings. For example, in Q4 2008, Overstock.com improperly reported a $1.014 million net profit instead of a $0.705 million net loss if it has followed GAAP.

In both cases, I provided the company with detailed information about its accounting irregularities, but its CEO Patrick Byrne chose to vilify me and continue violating accounting rules. In both cases, my analysis of Overstock.com's accounting violations was ultimately proven correct by its later revisions of financial reports. The S.E.C. is currently investigating Overstock.com for securities law violations.

Why was I was able to find accounting irregularities at Overstock.com missed by PricewaterhouseCoopers and Grant Thornton (the second and sixth largest accounting firms in the world)?  PricewaterhouseCoopers was Overstock.com's auditors from 1999 to 2008 and Grant Thornton was its auditors from Q1 to Q3 2009. Just like Professors Ketz and Catanach, I found accounting violations by merely reading Overstock.com's financial reports and comparing its financial disclosures to applicable accounting rules. I am not an accounting professor and I lost my CPA license because I am a convicted felon. Is a convicted felon and former CPA smarter than the company and two of the six largest public accounting firms?

Back in my Crazy Eddie days, in many cases I had to deceive my auditors at KPMG (then known as Peat Marwick Main) to manipulate earnings and defraud investors. In October 2000, Joseph T. Wells asked the following question about Crazy Eddie's auditors in the Journal of Accountancy:

Were the auditors stupid? No, just too trusting. After all, no one wants to think the client is a crook. But it happens all too often. That’s why the profession requires auditors to be skeptical.

I personally don’t believe that the managements of both Groupon and Overstock.com tricked their auditors into using improper accounting rules to misstate their respective company's financial performance. Further, I don’t believe that the managements and auditors of Groupon and Overstock.com were so stupid that they did not understand accounting rules. I believe that the managements of both companies simply chose to avoid following applicable accounting rules and their auditors condoned those practices. Seriously, can they be so stupid? If so, their audits are nothing but window dressing.

Public accounting firms are supposed to be gatekeepers and protect the integrity of financial reporting. However, financial reports have apparently become promotional materials to help inflate stock prices, rather than provide investors with a proper picture of a company’s financial performance. In too many cases, public accounting firms have become advocates of management at the expense of investors, creditors, and other users of financial information. Some investors don’t seem to care as long as they can profit from higher stock prices caused by improper accounting practices that are condoned management and so-called independent auditors.

Our government doesn’t seem to care, too. President Barack Obama wants cut red tape and make it easier for small companies to go public without going through a rigorous review process by the Securities and Exchange Commission. Front runner for the Republican Party presidential nomination Mitt Romney wants to repeal corporate governance and accounting reforms under the Sarbanes-Oxley Act altogether. Meanwhile, congressional Republicans have already succeeded in cutting funding for the Securities and Exchange Commission despite increased responsibilities under the Dodd-Frank Act.

Have you ever wondered why committing securities fraud is so easy and is going to get even easier in the future?

Written by:

Sam E. Antar

Recommended reading

TheStreet.com - Bucket List of Apologies -- SEC Edition by Gary Weiss

TheStreet.com - Obama Signals Green Light for Stock Fraud by Gary Weiss

Footnoted.com - The Footnoted Jobs Program... by Michelle Leder

Business Insider - "The Feds Are Drinking The Same Kool-Aid As Crazy Eddie's Former Auditors" by Sam E. Antar

Dag Blog -"Crazy Eddie" Fraudster Sam Antar To Return To Crime - Thanks to Darrell Issa & Anti-Regulation Republicans by William K. Wolfrum

Disclosure

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped my cousin Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes in cold-blood for fun and profit, and simply because I could.

If it weren't for the heroic efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals. Often, I refer cases to them as an independent whistleblower. In addition, I teach about white-collar crime for government entities, professional organizations, businesses, and colleges and universities.

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time. My past sins are unforgivable.

I do not have any position in Groupon or Overstock.com securities.

Will KPMG Ever Wake Up and Finally Learn Its Lesson after Being Duped into Completing Crazy Eddie’s Audits Too Early Twenty Three Years Ago?

Sometimes I wonder what it will take for major accounting firms like KPMG to finally wake up and learn the lesson of how criminal management teams dupe them into signing off on clean audit opinions before completing the field work, just as I did as the criminal CFO of Crazy Eddie back in the day.

KPMG cited by British authorities for prematurely signing off on audits

Recently, Adam Jones of the Financial Times reported that KPMG was “rapped for signing off on audits” before the completion of field work by the United Kingdom’s Financial Reporting Council:

KMPG has been rapped over the knuckles by the accounting watchdog for signing off on audits before all necessary work had been completed.

The criticism was made by the Financial Reporting Council as it told Deloitte, Ernst & Young, KMPG and PwC, the four biggest auditors, to do more to avoid conflicts of interest and be more sceptical of management claims.

The annual evaluations of the Big Four auditors comes amid increased regulatory scrutiny of the profession and its role in the financial crisis.

In the case of KPMG, the FRC’s Audit Inspection Unit looked at 15 audits and found that in three cases the auditor’s report had been signed too soon. Significant changes were subsequently made to the accounts in one case.

Paul George, director of auditing at the FRC’s Professional Oversight Board, which includes the AIU, said the early sign-off problem was not limited to KPMG: “It is a profession-wide challenge to some degree.”

KPMG said it accepted the AIU’s comments. “We are pleased to note that in no case did they think that the audit opinion we issued was incorrect,” said Oliver Tant, head of its UK audit arm.

The next day, popular Going Concern blogger Caleb Newquist was cynical of Oliver Tant’s remarks attempting to minimize the gravity of his firm’s negligence:

Okay, sure signing off early on 20% of the audits sampled sorta looks bad but at least the numbers weren’t wrong. It would be really awkward to explain that. 

KPMG was plain lucky that no audit opinions had to be changed as a result of their negligence. Back in my criminal days as main architect of the Crazy Eddie fraud, KPMG was not so lucky. If KPMG had taken the time to properly complete its filed work, they would have uncovered Crazy Eddie’s massive fraud.

How I duped KPMG back in my criminal days

In the hope of providing a wake up lesson to accounting firms like KPMG, below is my story about how I was able to dupe them into certifying Crazy Eddie’s financial reports before the completion of field work and giving Crazy Eddie a clean audit opinion in fiscal year 1987.

1987 was a year of desperation at Crazy Eddie

From the early 1970’s to 1984, Crazy Eddie was a profitable private company. Our frauds were focused primarily on understating our profits by skimming cash to commit income tax evasion and steal sales taxes.

In 1984, Crazy Eddie hired Main Hurdman as its auditors because we needed a large accounting firm to add a false sense of credibility to our financial reporting. In 1987, Main Hurdman merged with another large accounting firm Peat Marwick and was called Peat Marwick Main (PMM). Today, Main Hurdman and Peat Marwick are the US audit partners of large international accounting firm KPMG They are the “P” and “M” in KPMG.
 

As a public company from 1984 to 1986, our frauds concentrated on inflating profits or overstating income to help certain members of the Antar family ultimately sell about $100 million in stock at inflated prices.

However, in 1987, Crazy Eddie started losing money for the first time in almost two decades because of increased competition and a steep decline in consumer electronic prices which reduced revenues. We resorted to desperate measures to report profits instead of losses.

Fraudulently increasing the value of assets like inventories and fraudulently decreasing liabilities such as accounts payable or amounts owed to vendors inflates reported income or understates reported losses. We fraudulently inflated our inventories by approximately $30 million, but that feat was still not enough to avoid reporting massive losses. Therefore, we conceived of a plan to generate $20 million in phony debit memos which were supposed to be charge backs or offsets against amounts owed to vendors for such items as advertising rebates, volume discounts, and other reimbursements due the company. Those phony debit memos helped us show smaller accounts payable balances or lower amounts owed to vendors on our books and records.

Our accounts payable was only $70 million. Therefore, reducing our reported accounts payable by almost 30% through the issuance of $20 million in phony debit memos was a huge undertaking and we risked scrutiny of those debit memo from our auditors. However, we were desperately trying to cover up massive losses in 1987.

We needed to keep KPMG on a very short string

The lesser the amount of  time that KPMG (at that time called Peat Marwick Main) had available to audit Crazy Eddie’s books and records, the  easier it was for us to dupe them into issuing clean audit opinions on our falsified financial reports. It was my job to make sure that KPMG did not have enough time to properly complete its audit field work and appropriately examine Crazy Eddie’s books and records.

To accommodate Crazy Eddie’s management, KPMG regularly signed off on its audits about 60 days after our fiscal year ended. For example, in the fiscal year ended March 3, 1985, KPMG signed off on Crazy Eddie’s audit on May 2, 1985. KPMG signed off on Crazy Eddie’s fiscal year ended March 2, 1986 audit on May 1, 1986. Likewise, we hoped that KPMG would sign off on Crazy Eddie’s audit for the fiscal year ended March 1, 1987 on April 30, 1987 in following previous year’s practices.

Ultimately, I was successful in pressuring KPMG to sign off on Crazy Eddie’s 1987 audit on April 28, two days earlier than expected, despite the fact that major audit work was incomplete!

Note: Crazy Eddie’s fiscal year ended on the first Sunday in March which explains the difference in dates for the end of fiscal year’s 1985, 1986, and 1987.

Crazy Eddie’s audit was expected to last about eight weeks and KPMG planned to complete its field work in regular increments during that period. For example, by the sixth week (of eight), KPMG expected to have about 75% of its field work completed and 25% of its work left to do.

My job was to stall KMPG into having only 25% of its field work completed by week six and having 75% of its work left to do during the remaining two weeks of the eight week audit. Thus, KPMG had to do three times the usual amount of field work in the remaining two weeks. To get the work done and satisfy Crazy Eddie’s management, KPMG would skimp on certain key procedures. The plan worked!

Understanding the human frailties of auditors and taking advantage of them

As a general practice, most large accounting firms use relatively inexperienced kids right out of college to do much of the basic audit leg work. They are supervised by slightly more experienced senior auditors who unfortunately depend on feedback from these inexperienced kids in making informed decisions on the conduct of the audit. During the 1980s, both these kids and their supervisors were mostly young single males between the ages of 22 and 29.

As a 28 year old CPA myself, I understood that audits are very boring, tedious, and mundane for these young single male auditors. It was difficult for them to pay close attention to their work. It was relatively easy for me to distract them from performing their jobs without blaming me for stalling them or obstructing their audit work.

Photo from Going Concern blog

Rather than overtly obstructing our auditors’ field work, I engaged in a calculated plan to subtly distract them. I made sure that most of our auditor’s interactions were with cute Crazy Eddie female employees reporting to me, even if some of those females had no knowledge of our cooking the books.

I encouraged my female employees to flirt and get friendly with their young male KPMG counterparts and discuss audit issues with them over lunch and dinner on Crazy Eddie’s tab. Meanwhile, I spent much of my time taking certain higher level KPMG counterparts to pick up bars and other establishments frequented by good-looking women.

My female staffers provided the perfect distraction for KPMG auditors as they engaged in constant small talk and wasted precious time. By April 26, just a few days before the scheduled audit sign off, KPMG had not even started many key procedures and still had many unanswered questions.

Unanswered questions and unfinished audit work

In the previous fiscal year, 1986, we had falsified our store level inventories (not warehouse inventories) by $3 to $4 million. However, in fiscal year 1987, Crazy Eddie's store level inventories were inflated by $15 to $20 million as we desperately tried to cover up staggering losses.

In stores that existed in both 1986 and 1987, where the auditors observed inventory counts, those gross inventory levels increased from $21.95 million to $37.47 million or a staggering 71%, despite a huge drop in consumer electronic prices. On April 26, 1987, I was able to convince a certain audit partner not order a re-count of store inventories despite his questioning the unusual increase in store level inventories during a period of dropping prices.

Better yet, the audit test work on verifying the validity of $20 million of charge backs to vendors, which were actually phony debit memos, did not even start because of the effectiveness female employees in distracting the male auditors from doing their work. Moreover, the audit partner respected me as a responsive client and trusted me - a grave mistake.

In past years, I always gave in to his recommendations on being “conservative” and reducing reported income, even though I was only giving back the excesses of my inflated fraudulent numbers. I effectively played poker with a marked deck, giving back the cards I did not need. Therefore, I was able to convince that audit partner to sit on a board of directors meeting the next day on April 27, where the board approved Crazy Eddie’s numbers after questioning him and me.

On April 28, 1987, KPMG formally signed off on Crazy Eddie’s financial reports and issued a clean audit opinion, despite red flags in store inventory levels and uncompleted field work in verifying $70 million of accounts payable that was fraudulently reduced to $50 million by our issuance of $20 million in phony debit memos.

Taking advantage of the inexperience of our auditors

The audit staff member who was responsible for leg work on accounts payable had no prior experience in auditing accounts payable and only started working for KPMG six months earlier fresh out of college. He first learned about offsetting charge backs to vendors against amounts purportedly owed them or debit memos during the Crazy Eddie audit, much of it from me.

Since the audit was already officially completed, KPMG only examined the accounts payable or amounts owed by Crazy Eddie to three major vendors, out of thousands of possible vendors. Each of those three vendors reported significant discrepancies in amounts they claimed that Crazy Eddie owed them due to our issuance of phony charge backs to vendors or debit memos.

For example, Sony claimed that Crazy Eddie owed them about $5 million more than Crazy Eddie claimed it owed them because Sony never acknowledged receiving any such debit memos. The auditors never did any follow up contact with any of the companies, whose accounts payable balances they examined, concerning any discrepancies in amounts owed by Crazy Eddie.

On April 28, 1987, the inexperienced auditor finally started his test work on Sony (which contained about $5 million of the $20 million in phony debit memos), the very same day our auditors signed off on the audit according to his testimony in a sworn deposition.

The questions below were asked by Stephen Howard, Attorney from Milbank, Tweed, Hadley, & McCloy, who represented the Oppenheimer-Palmieri Fund, L.P., one of the major shareholders who in November 2007 took over Crazy Eddie in a hostile takeover:

Question: There’s a date at the bottom of the page which appears to be 4/28/87. Do you see that?

KPMG staffer: Yes, I do.

Question: Is that your handwriting.

KPMG staffer: Yes, it is.

Question: What does that signify?

KPMG staffer: It was my policy to date my workpapers when I began to perform test work.

Question: So that tells us you started this work on the 28th but it doesn’t tell us when you finished it?

KPMG staffer: That is correct.

In his other sworn testimony, young inexperienced auditor said that he continued his field work for more than one day, but couldn’t recall how many days it took for him to complete his work. In any case, KPMG already had signed off on Crazy Eddie’s audit.  KPMG had no incentive to do any additional significant field work that may cause them to change their audit opinion.
  
Key audit procedures missed

Crazy Eddie Antar mug shot after arrest

In previous years, we generated an accounts payable aging schedule for our auditors to review. That schedule provides detailed information about every invoice owed to vendors, any offsetting charge backs to vendors such as debit memos, and how long those items have remained outstanding.

However, for fiscal year 1987, we did not generate accounts payable aging analysis.  Therefore, our auditors were unable to determine the how long the phony debit memos were on Crazy Eddie's book and records and why, after the passage of time,  they were not used as an offset against payments to vendors.
  
In addition, the sheer volume of phony debit memos caused our books and records to show many vendors owing Crazy Eddie money, rather than the other way around! Those negative accounts payable balances were red flags that were never properly scrutinized by our auditors.

An excerpt from KPMG’s work papers said:

... traced all debit memos into A/P status report as of 03/01/87. No further work necessary.

An “A/P status report” simply lists all invoices owed to vendors and offsetting debit memos. Therefore, the debit memos were traced to a report listing the phony debit memo, in other words known as “garbage in, garbage out.” Our auditors simply traced the phony debit memos to the books and records that reflected them, but did no work to confirm the validity of those debit memos.

Weeks later, a senior staff member finally did conduct an interview of Crazy Eddie's Accounts Payable Manager (a female co-conspirator) and his work paper is dated May 22, 1987 or 24 days after KPMG issued its clean audit opinion of Crazy Eddie’s books and records.

Conclusion

KPMG may have dodged the bullet by not having to change any of its audit reports as a result of its recent failure in “signing off on audits before all necessary work had been completed.” If history is any guide, KPMG demonstratively failed to learn the lesson of their misdeeds during the Crazy Eddie audit. I wonder if they are at least better in covering up their mistakes this time around.

Written by,

Sam E. Antar

Disclosure

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped my cousin Eddie Antar and other members of our family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes in cold-blood for fun and profit, and simply because I could.

If it weren't for the valiant efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals. As an independent whistleblower, I often refer cases to them.

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time.

Hopefully, this blog post can get me into heaven, though I doubt I will ever get there.

Why Abolishing or Weakening Sarbanes-Oxley is Insane! Lessons from the Crazy Eddie Fraud

A message to any Democrat, Republican, or Independent lawmaker who is thinking of abolishing or weakening the Sarbanes-Oxley Act of 2002. As a convicted felon, who committed his crimes in cold blood and with callous disregard for my victims, I will publicly endorse each and every one of you as a champion of the white collar criminal class that are a cancer on the integrity of our great capitalist economic system. If you abolish or weaken Sarbanes-Oxley, you will make it much easier for corporate white collar criminals to cook their books and defraud investors.

According to Floyd Norris's column in the New York Times column:

The House Financial Services Committee this week approved an amendment to the Investor Protection Act of 2009 — a name George Orwell would appreciate — to allow most companies to never comply with the law, and mandating a study to see whether it would be a good idea to exempt additional ones as well.

In a new series of blog posts over the next few months, I will document why Sarbanes-Oxley should be strengthened with added reforms to protect the integrity of our capital markets. For starters, please read a letter that I submitted to the SEC and PCAOB Roundtable on Internal Control Reporting Requirements in 2006.

Respectfully,

Sam E. Antar (a convicted felon and former Crazy Eddie CFO)

Bidz.com Auditors Cited by PCAOB in Five of Thirteen Audits Sampled

Bidz.com (NASDAQ: BIDZ) should seriously consider replacing Stonefield Josephson Inc. as its auditors. According to a March 2007 Public Company Accounting Oversight Board (PCAOB) Inspection Report, Stonefield Josephson, Inc. was cited for significant deficiencies in five of thirteen audits reviewed or about 38.5% of audits sampled. See below:

The scope of the inspection procedures performed included reviews of aspects of the performance of 13 of the Firm's audits of the financial statements of issuers. Those audits and aspects were selected according to the Board's criteria, and the Firm was not allowed an opportunity to limit or influence the selection process. The inspection team identified matters that it considered to be audit deficiencies. Full report here.

The deficiencies identified in five of the audits reviewed included deficiencies of such significance that it appeared to the inspection team that the Firm did not obtain sufficient competent evidential matter to support its opinion on the issuer's financial statements.

Unfortunately, the PCAOB report does not identify which company audits failed inspection, even though many people have questioned such a policy. However, failing to "obtain sufficient competent evidential matter to support its opinion," in five of thirteen audits inspected, raises a red flag about the overall quality of Stonefield Josephson's audits.

This blog has written extensively about Bidz.com's inventory accounting disclosures and possible violations of Generally Accepted Accounting Principles in the company's accounting for inventories (details here, here, and here). The SEC started investigating such disclosures after I alerted them.

Bidz.com is besieged by a flurry of lawsuits, seeking class action status, alleging securities fraud by the company and David Zinberg (CEO and President), based on issues raised in reports by short seller Citron Research. In addition, the company is being sued for alleged shill bidding on its web site.

Written by:

Sam E. Antar

Disclosure:
I am a convicted felon and a former CPA. I pleaded guilty to three felonies for my role in the Crazy Eddie fraud as the former criminal CFO of the company.

I do not own any Bidz.com securities long or short.

White Collar Crime: How Criminals Exploit your Humanity

As a criminal, I considered your humanity as a weakness to be exploited in the commission of my crimes. I have often said that white collar crime is a crime of deceit and white collar criminals are artful liars.

A great President Ronald Reagan once said “Trust, but verify” when dealing with Russia during the cold war. However, as a criminal I took advantage of your initial inclination to trust me. I did anything in my power from charming you to pointing out the good deeds I had done in an effort to corrode your objectivity, professional skepticism, and cynicism.

During my many unpaid speaking engagements people often ask if I am still a criminal today. My answer is that you do not know if I am a criminal today since I live with temptation and sin every day. Just because I travel the country and give unpaid presentations on white collar crime and pay all travel expenses out of pocket, how do you know if I am building a false wall of integrity around me as I did during my criminal years at Crazy Eddie. You never know anyone’s intentions.

Herb Greenberg, Barry Minkow, and I Discuss White Collar Crime

Recently I had lunch with Herb Greenberg a columnist at the Wall Street Journal and MarketWatch.com and commentator for CNBC and Barry Minkow a former criminal known for the infamous ZZZZ Best fraud. Barry and I have become very good friends over the years. Unlike me, Barry Minkow went to jail for almost 8 years. Barry Minkow is now a Pastor, writer, teacher, and fraud investigator. His Fraud Discovery Institute has uncovered over about 20 frauds totaling over $2 billion. I talk about fraud, Barry uncovers it.

Herb Greenberg was interested in our perspective on criminality. Our conversation is recounted in an article published in the Wall Street Journal on March 3, 2007 entitled “My Lunch with 2 Fraudsters: Food for Thought for Investors” (subscription required) and in his MarketWatch.com Column: What 2 Crooks Told Me over Lunch - Commentary: You Cannot Accept Information at Face Value.

The most important fact I tried to convey to Herb Greenberg during lunch is quoted his column below:

I don't want to be held up on the pedestal of redemption," he says. "I would rather people learn from my vile, ugly and vicious crimes. It is most important that they understand the ugly nature of criminality. My life is a mistake of history."

A mistake, maybe, but one other people can learn from. "Do not trust -- verify," was his mantra as the meal began.

Verify what?

"Everything."

Even whether Mr. Antar and Mr. Minkow aren't still scamming?

"Everything."

And so it went, with Mr. Antar continuing with emails over several weeks.

"Watch how management handles bad quarters, earnings disappointments, criticism, skepticism and cynicism," he says. "Do they start by saying, 'We take full responsibility and make no excuses' -- only to follow by carefully worded innuendos, excuses and deflection? Do they question the integrity of those who ask questions?"

He continues: "Just because a CEO takes a $1 salary doesn't make that person immune to criminality. Just because I travel the country and teach the government, colleges and universities, and professional groups about white-collar crime and never collect a fee and pay out of my own pocket all travel costs, doesn't mean I am not a criminal today. Remember that many crimes are committed without economic gain for reasons of ego, status and sheer arrogance."

About White Collar Criminals

The Association of Certified Fraud Examiners issues a “Report to the Nation” every year which examines white collar crime. In each report it concludes that over 90% of white collar felons had no previous criminal record. When you exclude low level white collar crimes I’ll bet that the statistic for white collar felons without criminal records is almost 99%.

For example, Bernie Ebbers (WorldCom), Kenneth Lay (Enron), Jeffrey Skilling (Enron), Dennis Kozlowki (Tyco), and Sanjay Kumar (Computer Associates) did not have any criminal records. Until their convictions, they were men known for many of their charitable deeds and community service. However, these men were later convicted of massive frauds.

Did they build a false wall of integrity around them? I explained to Herb Greenberg during lunch as quoted from his article:

He adds: "Criminals are scared of skeptics and cynics," he says. "We are petrified when you verify our representations."

Did he ever have remorse? "Never ... We simply did not care about any one of our victims. We simply committed crime because we could.

"As criminals we built false walls of integrity around us," he adds. "We walked old ladies across the street. We built wings to hospitals. We gave huge amounts of money to charity. We wanted you to trust us.

"Simply said ... if you want to be an investor, you cannot accept information at face value.' Unexamined acceptance' is the greatest cause of investor losses."

Lee Distad’s Professional Opinion Blog about a Deloitte & Touche Audit Melt Down

I recently received an e-mail from another blogger, Lee Distad, whose blog is called “Lee Distad’s Professional Opinion.

Mr. Distad had written a previous post on his blog entitled “Sam E. Antar is not afraid to tell you what he thinks!”

In that post he wrote:

The current front runner to receive the award for 2006's (and at this rate 2007 as well) Most Gregarious Internet Citizen may well be Sam E Antar, the former CFO for Crazy Eddie's, who masterminded one of the largest financial frauds in history…. On top of that, he's not afraid to call a spade a spade, giving his opinion on a number of current financial scandals.

He asked me to comment about his latest post “Institute of Chartered Accountants of Ontario Sends a Message” in which he wrote:

The Institute of Chartered Accountants of Ontario quietly dropped a bombshell earlier this month. Buried deep on the website of the professional body is a scathing report finding three senior Deloitte & Touche LLP auditors—including the accounting firm’s former chairman—guilty of professional misconduct in connection with Livent Inc.’s financial statements.

According to the 72-page ruling from the ICAO Discipline Committee, the auditors failed to follow up on accounting red flags, did not follow their own auditing procedures and continued to rely too heavily on the honesty of Livent’s managers—despite repeated instances where executives allegedly lied to them. “The auditors said that their skepticism was ‘sky high,’” reads the ruling. “However, with respect to the impugned conduct, the evidence disclosed that the auditors failed to exercise the professional skepticism required.” (Source: Canadian Business Online - Professional Misconduct by John Gray)

The Crazy Eddie Audit

The events surrounding the actions involving Deloitte & Touch and Livent remind of an award winning article written by Joseph T. Wells (founder of the Association of Certified Fraud Examiners) in October 2000 entitled “So That’s Why They Call it a Pyramid Scheme.” In discussing the conduct of Crazy Eddie’s auditors he wrote:

"....Were the auditors stupid? No, just too trusting. After all, no one wants to think the client is a crook. But it happens too often. That's why the profession requires the auditor to be skeptical."

The accounting profession is still not adequately prepared to do battle with white collar criminals. Today, less than 20% of accounting students ever take a single specific college level course devoted to fraud or criminology before graduation. The American Institute of Certified Public Accountants only “suggests” rather than “requires” that CPAs take a mere 10% of their continuing education credits in fraud subjects.

Audits are too often used as training grounds for relatively inexperienced staff members. I doubt even today from seeing the mistakes of Crazy Eddie’s auditors and other audit melt downs being repeated by other auditors time and time again that the accounting profession really understands their main enemy – the white collar criminal. The unfortunate result of this lack of understanding has resulted in billions of dollars in unnecessary litigation costs and payouts for many accounting firms and even countless billions in shareholder and creditor losses.

When I read from Lee Distad’s post that “… the auditors failed to follow up on accounting red flags, did not follow their own auditing procedures and continued to rely too heavily on the honesty of Livent’s managers—despite repeated instances where executives allegedly lied to them” I am reminded of my own criminal actions.

Crazy Eddie’s auditors ignored many red flags too. However, as evident from Touch Ross’s actions in this case and many other cases I have studied the accounting profession still has problems dealing with skepticism and cynicism. Too often, Crazy Eddie’s auditors relied on the truthfulness of our assertions despite obvious red flags. In too many instances, they did not know how to ask proper questions, whom to ask such questions too, and how too follow up on our deceitful answers.

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.

The Problem with Audit Committees

Auditors are supposed to be monitored by “independent” Audit Committee composed of some members who are supposed to be “financial experts.” Most Audit Committee members including the so-called financial experts know less about accounting, audits, internal controls, and fraud then the independent external auditors they monitor.

Worse yet “independent” Audit Committee members can own stock and have stock options in the company on which they serve as Audit Committee members. The independent external auditors cannot own stock in the clients they audit.

Therefore, I cannot understand how these Audit Committee members who own such stock and have such stock options in the company Audit Committees they serve on can legitimately call themselves independent. In too many cases “independent” Audit Committee members are unqualified and lack true independence despite compliance with current Securities regulation.

The Problem with Wall Street Financial Analysts and How Companies Handle Them

Companies are watched by Wall Street financial analysts. Recently Herb Greenberg wrote in his “Market Blog” on February 26, 2007 a post entitled “UPDATED: BankUnited: Getting a bit Testy!”

In particular I note the following quote from his post:

BankUnited is hosting and analyst/investor meeting today and tomorrow. However, we were not invited to attend and executive management continues to ignore our phone calls and e-mail messages seeking information about several areas where we have fundamental concerns, including rapidly deteriorating asset quality, an acceleration of negative amortization growth on option ARM loans, lower loan sale gains, and subsiding margin expansion.

I wrote the following comment to his post:

To Wall Street Analysts:

Beware of companies that exclude critics and provide “selective” access to management. Too often, Wall Street analysts in the quest to gain access to management end up corrupting their required professional skepticism and cynicism. I played this game very well with Wall Street analysts as the CFO of Crazy Eddie.

It’s not about gaining access at the cost of your professional integrity. It’s about understanding what is really happening and communicating it to your readers.

I played you guys very well by rewarding you with selective access as the CFO of Crazy Eddie. I had you guys eating out of my hand with “selective” disclosures and “favored” access. While you craved for access and wrote your glowing reports in gratitude for your coveted access you unwittingly helped make the frauds we perpetrated on the public easier.

If you had any backbone, you would all boycott any presentation that excludes the more skeptical professionals among you. Frankly, after reading many transcripts lately you guys look like amateurs with your lack of questioning skills, your inability to ask proper follow through questions, and obtain straight, clear, unambiguous, and honest answers.

You seem like hand picked patsies as I read your unchallenging questions and the lame answers management that responds to you without any challenge or follow up. However, you guys never seem to learn as you compete with one another for the affections of management and let access to them rule at almost any cost.

Eventually you will run into a guy like me. You will wish you asked the proper questions and follow up questions too. You will wish your other peers attended the meetings and asked questions you would not ask or could not ask. The questions that will never be asked by you and others will cause you to miss out on the lies and deceit being spun upon you.

When the “surprises” come out your previous work will be considered negligent and amateurish. Your future work will always be under a cloud of suspicion. You will be remembered for the glowing reports you made as management ran circles around you. Do you want people to think you are fools?

The management’s that spread deceit and lies to the selective few who gain coveted access are not your friends. They are using your humanity against you as a weakness to be exploited in furtherance of their crimes. They know about how your efforts at coveted access end up corrupting your professionalism. They don’t care about what happens to you as a result of their actions. As a criminal, I never cared about you too.

You have been warned.

Respectfully,

Sam E. Antar (former Crazy Eddie CFO & convicted felon)

PS: Guys, I see nothing much has changed since my time. Keep it up. When a company you wrote a glowing report on ends up a train wreck

White Collar Crime and Punishment

As a criminal I feared skepticism and cynicism but I never feared going to prison. My good friend Barry Minkow (discussed above) spent about 8 years in prison has said that “The prisons are filled with convicts who never planned on being there.”

Professor Larry E. Ribstein (University of Illinois) wrote a post on my lunch with Herb Greenberg in his Ideoblog entitled “Crazy Eddie speaks.” He wrote:

In general, Antar says corporate criminals will commit crime because they can, and warns investors to distrust financial statements. There are some valuable lessons for the law there.

First, Antar raises questions about the deterrent value of criminalizing corporate behavior, or at least of sentencing. I've focused on the potential for over-deterrence where the conduct is not genuinely criminal. The response I often get is that lighter penalties would under-deter. Yet Antar suggests these criminals aren't thinking much about the penalties when they commit their behavior. Only after the serious fraudsters spend some time in jail do they truly learn they've done something wrong. But do they really need 24 years there?

As a criminal I can tell you that I never thought about going to jail. My co-conspirators and I only thought in terms of whether we could successfully commit our crimes. I believe that no white collar criminal finds new levels of morality by reading or learning about the long prison sentences now being imposed for white collar crime. I believe that no crimes in progress have been stopped or any planned crimes were stopped from being implemented just because of the 20 plus year prison sentences given to many white collar criminals.

The best way to prevent white collar crime is to build strong barriers that limit the opportunity to commit such crimes. Strong internal controls, effective oversight from truly “independent” Audit Committees, a properly trained and experienced accounting profession, and laws like Sarbanes-Oxley stop crime before they happen.

Unfortunately today too many frauds are uncovered through the use of informants and because they implode since they become too large to be sustainable. We have a system from the criminal’s point of view which can be termed:

Catch us when you can, catch us where you can, and catch us if you can.

However, when you catch us it is too late to undo the massive damage done to society.

I respectfully disagree with Professor Ribstein when he writes:

But do they really need 24 years there?

While we both agree that prison sentences have little deterrent effect, it is my belief that they are necessary to impose the proper amount of responsibility and accountability on white collar felons.

White collar crime can be just as brutal as violent crime in that it imposes a collective harm on society. The main pillar of our great capitalist free market economic system is the reliability and integrity of financial information. When our capital markets lose faith in the integrity and reliability of financial information the collective market capitalizations of all companies suffer.

White collar crime not only effects the companies directly victimized. It results in layoffs at the specific company defrauded, losses to the creditors of such companies which in turn result in layoffs at companies who extended credit to the defrauded company.

In the case of Enron thousands lost their jobs at Enron, an entire accounting firm went into dissolution which caused more thousands of jobs to be lost. Pensions lost value and many Wall Street firms paid billions of dollars in litigation. In the early millennium we witnessed a broad decline in the collective market capitalizations of all companies as a result of major securities frauds at several companies.

Do I have any Guilt and Remorse?

In during my lunch Herb Greenberg asked me if I harbor any guilt and remorse for my past vile and malicious criminal acts.

He wrote:

A former CPA, Mr. Antar makes no excuses for his criminal past, referring to himself in emails, casual discussion and his Web site -- whitecollarfraud.com -- as a "low life" and "convicted felon." Even the normally loquacious Mr. Minkow appears to enjoy leaving the talking to Mr. Antar, who takes no money for his speeches. "I don't want to be held up on the pedestal of redemption," he says. "I would rather people learn from my vile, ugly and vicious crimes. It is most important that they understand the ugly nature of criminality. My life is a mistake of history."

Later in his column he wrote:

Did he ever have remorse? "Never ... We simply did not care about any one of our victims. We simply committed crime because we could. During the conduct of my crimes I never lost one nights sleep or spent one moment caring about the harm I was inflicting on others.

Apologies are irrelevant. They don’t change anything. It does not undo any crimes. Does an apology really erase the effects of past criminal behavior?

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. For example if I apologize for my actions, how do you really know if I am contrite or if anyone else who apologizes is really contrite? Therefore, judge people more by the actions they take after a mistake or error rather than their well sounding apologies.

I once posted the following comment about guilt and remorse on Jeff Matthew’s blog for his commentary entitled "Weekend Edition: Page Six comes to the Times":

I am fully aware that my sins are unforgivable and am mindful of the pain and suffering I have caused others.

Do I spend these late nights writing these comments to you because of guilt, redemption, or rather the fear of the ultimate punishment that awaits me when my soul parts my body?

This post was written and respectfully submitted by Sam E. Antar (former Crazy Eddie CFO & Convicted Felon)

An Open Letter to KPMG, PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young, and other Accounting Firms Subject to Inspections by the PCAOB

It is evident that the Public Company Accounting Oversight Board (PCAOB) is either in some cases unwilling or unable to release certain important information relating to its inspection reports of your audits. You are great firms staffed with good people who are much more moral than me.

Why not voluntarily release the nonpublic portions of such inspection reports? In addition, why not release how many actual inspections the PCAOB actually conducts of your firms on an annual basis? Why not provide the public with the percentage of how many of your audits result in deficiency citations by the PCAOB?

If I can publicly discuss my past deceitful sinful criminal actions in the starkest of terms surely you great people who are much better than me can voluntarily disclose such information about the effectiveness of your audits?

Other respectable people have called for the more transparency from the PCAOB and have apparently been ignored.

Do you have can we say more transparency than a convicted felon? It takes courage or maybe just some balls, too.

Respectfully,

Sam E. Antar (former Crazy Eddie CFO & convicted felon)

Special Compliments to the following Blogs covering this issue:

The CFO Blog by Alix Nyberg Stuart: How the PCAOB Shields the Big Four

The CFO Blog by Tim Reason: EY, KPMG, and the Meaning of Failure

The D & O Diary by Kevin LaCroix: The PCAOB's Audit Inspection Reports

Notions on High and Low Finance by Floyd Norris: Accounting Games

Note: I am sure countless others have covered this topic too.

Open Letter to Public Company Accounting Oversight Board

Dear Public Company Accounting Oversight Board:

According to Section 104 of the Sarbanes-Oxley Act you are required to “conduct a continuing program of inspections of registered public accounting firms.”

I am trying to determine how many such inspections you conduct with your limited resources by each individual accounting firm and the scope of each inspection. In addition I would like you to provide the public with the percentage of how many such inspections result in audit deficiency citations by each firm. If you can further classify such audit deficiency citations by degree of seriousness as it relates to the total number of inspections conducted that too would be appreciated.
If you have any questions, please call me (my phone number is listed on my web site http://www.whitecollarfraud.com/).

The public needs to know the relative quality of the audits of public companies by the accounting profession. After reviewing your web site I believe that inadequate data exists to make such a determination.

The inspection reports are too vague to get any meaningful quantifiable information as to the overall quality of audits conducted by individual firms. For example there is no direct information on any of the inspection reports that tells of the total amount of audit inspections conducted. It only gives the total amount of field offices visited.

I sent you an e-mail requesting certain information below:

• Does the PCAOB release statistical information as to how many such inspections are conducted? (By each Auditor and overall)
• Does the PCAOB release statistical information as to the scope of the inspections done? (By each Auditor and overall)
• Does the PCAOB release statistical information as to the percentage of inspections that result in deficiencies? (By each Auditor and overall)
• Does the PCAOB release statistical information of the possible or potential economic impact of deficiencies as a percentage of each audit and total audits inspected? (By each Auditor and overall) (By each Auditor and overall)
• Would the PCAOB release any of the above information if available? (By each Auditor and overall)
• Would the PCAOB release any statistical analysis as to the overall quality of the audits it inspects? (By each Auditor and overall)

I received the following reply from you:

The PCAOB has determined what information is to be made public via the public portions of the inspection reports, which can be found on the PCAOB’s website: http://www.pcaob.org/ and the annual report it issues.

Thank you

After receiving the e-mail I found out that the PCAOB in its Annual Report does release the total number of inspections but does not break down the information by individual firm. It is impossible to derive that information by individual firm since the PCAOB does not provide individual audit firm inspection amounts. The PCAOB should have such information readily accessible.

As an entity that is supposed to promote transparency in financial information I find such an answer both unsatisfactory and appalling. I do not believe you need to be lectured by an ex-felon whose very actions helped contribute to the creation of the Sarbanes-Oxley statute and your agency.

However, you should know that unlike most CPAs (many of whom serve in your entity) who passed the CPA exam being members of the (300 club with the curb) my average was 91.25% so I know a little bit about accounting. From my experience as a criminal I know a lot about white collar crime and your reason for being.

If I sound a little upset at you I am. Please do not play the side step with a felon like me who knows the game all to well. Be forthright and present your information front and center. If it is hidden some where on your website show it up front.

Now if it’s the law that is preventing such disclosure write a letter to Congress and change it. It should take about a week to get your people together to get the signatures. You have had years to do it. If the data is available it takes one of your people about a couple of days with an Excel spreadsheet to put it on your website front and center so every can read it and analyze it without going around circles.

Others are questioning your constitutionality. I have been a staunch ally. Maybe we should start from square one. If that actually happens, God help us all.

Respectfully,

Sam E. Antar (former Crazy Eddie CFO & ex-felon)

Audit Committees and External Auditors: A Perfect Storm for Disaster

We are supposed to believe that public company external auditors working with audit committees pose an effective deterrent against corporate malfeasance.

However, from my own experience at Crazy Eddie and listening to the experiences of others audits are over-used as training grounds for inexperienced, under trained, and not adequately educated staffers no more than a couple of years out of college.

Worst yet, is the lack of sufficient supervision and oversight their managers and audit partners exercise over them. Many of these managers and partners too suffer from an educational background that did not adequately prepare them to deal with clients such as criminals like I was.

As a result we get “packaged” and “process oriented audits” where a “fill in the blanks” and “check the boxes” approach on audit programs are prevalent. The criminal like I was who always has the initiative and uses a judgment based approach has a fundamental advantage over the external auditors. The external auditors are almost always outmaneuvered by the criminal at every turn.

The external auditors are supposed to be monitored by the Audit Committee of the Board of Directors. In practice such Audit Committees are no better prepared (if not worse) to handle their responsibilities than the external auditors they oversee.

Many Audit Committee members receive compensation in stock options or own company stock of the Board they serve on which provides a disincentive to effective independent oversight and can affect their objectivity and professional skepticism.

In addition, many members of Audit Committees have no formal accounting, auditing, internal control, and fraud education or backgrounds. Their requisite education, skills, training, and experience required to fulfill their responsibilities are lacking.

Over the last week two blogs I read were Jeff Matthews Is Not Making This Up (It Took Apollo Group How Long to Figure This Out?) and footnoted.org (The Political Graveyard?).

Their commentary reinforced to me that the “perfect storm” of convergence of ill trained auditors and “window dressed” Audit Committees is a built in recipe for more massive fraud to come.

In Jeffrey Matthew’s blog when discussing possible stock option back dating he asked:

“So it took the educational geniuses at Apollo Group how long to figure this out and hold somebody accountable?

My detailed answer to Mr. Matthews was contained in a four part post on his site discussing at length the issues outlined above (see my comments to Mr. Matthews post).

In footnoted.org the basic question asked was:

“So where do former members of the House and Senate, not to mention Governors and former Cabinet members go when they exit from the political stage?”

Well, many of these former politician’s end up on company Boards and their Audit Committees.

My short answer to footnotes.org is that I am reminded of what General Douglas MacArthur once said “"old soldiers never die; they just fade away.”

I say we should not let these politician’s fade away on our company Boards especially Audit Committees unless they are fully specifically qualified to serve their functions.

With regards to both blog commentaries I am reminded of the “Peter Principle” that people rise to their level of incompetence.

No doubt that many such Audit Committee members will defend their status saying the have complied with applicable laws.

However I ask you as it is written in The Apollo Group’s 10-k (and many other company 10 – ks too) what level of education, knowledge, training, and skills would you demand of Audit Committee members who job function is:

“…reviewing the financial information which will be provided to shareholders and others, the systems of internal controls, which management and the Board of Directors have established, the performance and selection of independent registered public accounting firm, and our audit and financial reporting processes.”

Would you want Audit Committees composed of members with an accounting, auditing, internal control, and fraud background at the very least? Mere exposure to these issues in their past by such members does not cut it with me.

Under the item 401 (h) of SEC Rule S-K at least one Audit Committee member must be a “financial expert.”

The problem with that rule is that it allows persons who have experience in supervising people more qualified than them for their specific functions to be considered a “financial expert.”

A good CEO without an educational background in accounting, auditing, internal controls, and fraud hardly qualifies to serve on an Audit Committee. Too make matters worse many such persons in Committees have no background in the business the company operates.

From inadequately prepared accountants to inadequately staffed Audit Committees I see here is a “perfect storm” for the future massive financial frauds that surely will occur.

Therefore, anyone reading this post be forewarned – the worse is yet to come!

Warning to Business: We require better education for accountants and auditors, more independent audits, and better barriers to white-collar crime

I recently told five audiences in Bowling Green, Ohio and Toledo, Ohio that white collar crime can be just as brutal as violent crime.

White collar crime inflicts a collective harm on society that does not affect only the companies that were defrauded. It affects the integrity of our financial markets, raises the cost of capital and debt, causes unemployment, and is a cancer on capitalism.

Michael Chertoff who prosecuted the Crazy Eddie criminal case called Eddie Antar the "Darth Vader of Capitalism." White collar criminals are economic predators and are the scum of our free market capitalist economic system.

An article entitled, “In BGSU talk, 'Crazy Eddie' figure backs better audits” written by Homer Brickey in the Toledo Blade published on October 5, 2006 said in part:

This week Antar is telling four Toledo-area audiences the business world needs better education for accountants and auditors, more independent audits, and better barriers to white-collar crime. The four-year-old Sarbanes-Oxley Act, intended to clean up corporate fraud, is just a beginning, he said.

"Our capitalistic system depends on the integrity of financial information," Antar told a classroom of graduate accounting students at Bowling Green State University yesterday. But, he cautioned them: "The word 'trust' is no longer in the dictionary. [For you] it's a professional hazard."

And he warned them they'd better be prepared to detect frauds committed by "the scum of the scum, like me."

Antar, 49, former chief financial officer of electronics-retailer Crazy Eddie and now a convicted felon, told The Blade, "The entire [accounting] profession is not being properly trained to detect white-collar crime."

Fewer than a third of 1,000 colleges offering accounting majors have fraud-detection courses, although BGSU does, and too few students are required to take the ones that are offered, he said. He planned to encourage members of the area chapter of Financial Executives International to go beyond requirements in Sarbanes-Oxley, imposing more stringent internal controls to ensure that no more disasters like Enron and WorldCom occur.

Former Federal Reserve Chairman Alan Greenspan Speaks Out about Sarbanes Oxley and I Answer Him Back

Dear Alan Greenspan:

I have read recent accounts in the press about your views on Sarbanes-Oxley. According to an article in the Boston Herald in an article entitled, “Greenspan Unleashed” written by Brett Arends and published on September 26, 2006:

The only part he praised was the rule that chief executives had to certify their companies’ accounts personally.

‘‘The rest we could do without,’’ he said.

As an ex-felon, former CPA, and former Chief Financial Officer of Crazy Eddie who helped mastermind one of the largest securities uncovered in the 1980’s I believe, respectfully, that I am uniquely qualified to address this specific issue.

Criminals have no problem signing false certification documents in furtherance of their crimes. It is simply a natural extension of the deceit and lies we use to successfully execute our crimes.

If you also mean that regulations under Sarbanes Oxley which prevent public accounting firms from offering consulting services to the client’s they audit should be scrapped (as implied in your remarks and the article quoted above) than I feel I must share my specific experiences as a criminal with you to understand why I respectfully disagree with your views.

White collar criminals use your humanity against you. One of our tools is the use of your gratitude towards us as a means of reducing your objectivity and weakening your skepticism of us. We believe that our victims become so intoxicated with our generosity and largess that they become resistant, scared, and embarrassed to ask critical questions as “red flags” are raised.

For over 15 years Crazy Eddie had certified financial statements. In the early years audited by a small accounting firm and in later years as a public company were audited by a firm which is part of the “big four” accounting firms.

With regards to the smaller firm (by the way I got my CPA experience working for them) Crazy Eddie was the largest client and awarded them consulting agreements whose monetary value was way in excess of their auditing fees. When the larger accounting firm succeeded the smaller firm of auditors we continued to award that firm consulting agreements as much as six times the value of the audits.

Both firms knew that we as “customers” could go else where for such consulting agreements. As a result we as criminals used their gratitude against them.

Whenever “red flags” came up they always accepted management’s version of the truth where any reasonable person would not. As a result they surrendered their “professional skepticism” and required healthy dose of cynicism to conduct their audits in a professional and effective manner.

An additional strength of Sarbanes Oxley is the requirement that companies have strong external controls which are reviewed by independent external auditors. Strong internal controls are the most effective means of preventing white collar crime.

Strong punishment while necessary is not by itself an effective deterrent to crime. Most white collar criminals think in terms of whether they can successfully execute their frauds. We require barriers such as strong internal controls to frustrate such plans.

Audits cannot be effectively conducted in the absence of strong internal controls. Even if the auditors could count even asset and liability to the penny issues remain about how such assets and liabilities were generated.

For example with the absence of effective internal controls the auditor cannot determine if all cash came from sales rather than laundered funds or other means.

Above I have used only a few examples to respectfully criticize your remarks. Please read my submission of comments to the Securities and Exchange Commission and the Public Accounting Oversight Board for in my whitecollarfraud.com web site for additional details.

I am willing to approach your remarks with an open mind. However, as a criminal who admits that my crimes were committed “just because I could” with “no rationalization I caution you that the public would not be swayed by my endorsing your position on Sarbanes Oxley.

Rather as a person who has no qualms telling people about the brutal nature of my criminality (from the collective harm it has caused many victims) I believe the public understands that my position carries more credibility than yours by my opposition to any weakening of Sarbanes Oxley.

We both have common ground in understanding that the reliability of financial information is the main pillar that supports of great free market capitalist economic system. I hope that you realize that white collar criminals subvert confidence in our financial markets and economy and as a result we inflict collective harm well beyond our defrauded companies.

I am also unhappy with Sarbanes Oxley as it should include effective competency mandates for an accounting profession that is not adequately educated, lacks necessary skills, and training to effectively implement this legislation.

You are surely a decent person and intelligent person who has lived a far more greater and productive life than a disgraced ex-felon like me. Therefore, when you hear my caution about the dangers of gutting Sarbanes Oxley and its reforms from a criminal it is designed to protect you from, you should carefully heed my warnings.