Monday, October 11, 2010

Documentary of the Crazy Eddie Fraud

A documentary of the Crazy Eddie fraud has recently become available on YouTube (clips embedded at the end of this post).  Sam Antar, Crazy Eddie's former CFO described the motivation behind the fraud as follows (via White Collar Fraud):
We committed crime simply because we could. Criminologists like to analyze white collar crime in terms of the 'fraud triangle' -- incentive, opportunity, and rationalization. We had no rationalization. Simply put, the incentive and opportunity was there, but the morality and excuses were lacking. We never had one conversation about morality during the 18 years that the fraud was going on.
Sam goes on to advocate a regulatory environment aimed at reducing incentives and opportunities for fraud:
Unfortunately, our policy makers in Washington and even Crazy Eddie's former auditors still apparently have not learned any lessons from the past and continue to make white-collar crime easy for the criminals. For example, the Dodd-Frank Act watered down Sarbanes-Oxely by exempting small companies from internal control audits. Crazy Eddie would have been exempted under those provisions, too. KPMG (Crazy Eddie's former auditors) was recently cited by the United Kingdom’s Financial Reporting Council for signing off on audits too early, the same mistake they made at Crazy Eddie.

While I am glad that business schools have pushed to increase ethics education as part of the standard curriculum, I think that Sam has a great point--we can't rely on character alone (i.e. lack of rationalization) to prevent fraud, especially in an environment where opportunities and incentives for fraud tend to be incredibly high.  If you aren't already following Sam's blog, White Collar Fraud, I would highly recommend you check it out.

Part 1:

Part 2:

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