Crazy Eddie Inc Case Study Examples

1. With a 22.7% gross profit ratio, and a 5% return on assets, there is a huge red flag raised. It makes no sense when looking at Crazy Eddie’s figures as to why the profit ratio should be so low. With a profit margin of just 3% over a three-year period, a red flag is raised. This is because with so many millions of dollars in sales, one would expect the gross profit ratio and return on assets to be higher, especially since the chain was expanding during this time period. Because of this, an audit was necessary in order to determine where the missing keys to the puzzle were.
2. In order to detect the misinformation and accounting irregularities performed by Crazy Eddie, there needed to be auditing procedures in place. Had Crazy Eddie personnel had such procedures, the problems when it came to accounting inconsistencies and accusations of fraudulent behavior would have been caught. Rather than allowing inventory count sheets prepared by an individual, there should have been many checks in place. First, there should have been a follow up by the staff of Crazy Eddie when it came to overseeing the auditing process. If one person was filling out the count sheets, someone should have come in behind to double-check the figures. By performing cross-checking in this manner, many of the problems that cropped up when it came to accounting irregularities could have been caught. Second, the auditor should have been hired from outside of the company rather than inside of the company. By hiring an auditor who could not be completely objective, the personnel at Crazy Eddie’s sent off a red flag. Third, it was important to have a consistent system for tracking and verifying the information. Because the company went back to manual methods of record-keeping, and left the previous method of using a computer to track inventory, the method was not nearly as accurate. Finally, by performing background checks on those in charge of auditing, Crazy Eddie could have found that there were past problems and fraudulent activities performed by those in charge of the auditing procedures.
3. In the changing landscape of the retail consumer electronics industry, it was important that audit planning decisions reflected these changes. With more expensive electronics available and the rapid pace at which the electronics technology available changed, it would have been vital to audit the electronics the store was receiving. Because of the technology that was rapidly becoming more available, had Crazy Eddie invested in the computers and software necessary for inventory tracking, the audit red flags could have been minimized. With the advent of software for tracking inventory, cross-checking and more frequent audits would have been possible. By not taking advantage of this much easier means of tracking inventory, the Crazy Eddie personnel put the integrity of the company’s inventory logs at risk. At the same time, with the entry of technology into the playing field, it became increasingly important to ensure that the company performing the audit was not the same as the company providing the software for keeping inventory or accounting information.
4. The term “lowballing” refers to grossly underestimating a cost deliberately. Main Hurdman charged only $85,000 to audit Crazy Eddie – a very low price for a company that at the same time was paying millions of dollars for a computerized inventory system provided by the same company. This practice can affect the quality of audit services provided in several ways. First, by lowballing an estimate, an auditing may find that it requires much more time or resources to complete the estimate. If the company being audited does not have this kind of time or resources available, then the company may be forced to cut corners when it comes to the auditing process. Additionally auditor lowballing can reduce the quality of an audit significantly and it can weaken the auditor’s independence. When it comes to the situation at Crazy Eddie, we can see that lowballing the client personnel both compromised the independence and quality of the auditing services.
5. Should the client personnel be unable to locate 10 of the requested invoices, I would be incredibly concerned. My superiors and I should respond to the situation by first following up, to ensure the invoices were, in fact received. The records should indicate where the invoices were to have come from. We should contact that agency in order to see whether we can get copies. Should an invoice not be available, then we need to escalate. If the inventory is also not in the store, then there are potentially fraudulent accounting processes occurring. Because of this, it will be important to report the problem to the appropriate channels as soon as is possible.
6. Companies should not be allowed to hire individuals who formerly served as their independent auditors. By doing this, they run several risks. First, the company hiring the individual who had served as an independent auditor may find that there are problems in accounting. This may be because the company’s new employee will be well-versed in what the auditors look for. By being versed as such, the independent auditor may be better able to conspire to commit fraudulent activities or may be willing to take more risks than otherwise he or she would. Second, hiring an individual who had been an independent auditor will raise red flags, even if the company is not conducting themselves in a way leading to inconsistent accounting practices. This is because such a practice then takes away the independence – and calls the independence of the auditing company into question. It creates a situation where there is a conflict of interest.