Talking Fraud With A Reformed Fraudster

This week, Compliance Week chats with Sam Antar—former CFO of Crazy Eddie’s, the disgraced stereo equipment business that foisted a $70 million fraud on investors in the 1980s. Antar helped mastermind the scheme, and then was a star witness in the trial that sent his cousin Eddie Antar to prison. Today, Sam Antar is an outspoken champion of Sarbanes-Oxley reforms. Below are Antar’s frank views of how financial fraud operates and what more America should do to prevent it. An index of previous conversations is available here.

You’ve said that Crazy Eddie had a culture of tax evasion that led you to commit fraud. Where do you rank “tone at the top” as a control against fraud?

“Tone at the top” is the most important thing. Too much centralized authority at the top sets the nature of the rest of the organization. If there’s too much centralized authority at the top, the rest of the organization is going to suffer. That’s one of the biggest red flags, because management can override all of the internal controls.

Do you think Corporate America gets it when you talk about “tone at the top”?

Corporate America doesn’t get it. I was an officer and director of a public corporation. I broke and corrupted the sacred trust that was put upon me by the shareholders, the employees and the vendors and the public. I corrupted the main pillar of the free market system—the integrity of our financial statements—by committing fraud.

The well-meaning people of high integrity, who have never committed crimes, and who propose to weaken Sarbanes Oxley, are misguided. They don’t see its strengths from the perspective I have to offer.

You believe small companies shouldn’t get any exemption from Sarbanes-Oxley. Tell us why.

I believe that SOX should be uniformly applied to all companies. I do not believe there should be any leniency for small companies since SOX applies to public companies. Companies collecting money from public sources have an added fiduciary duty.

My transgressions caused the company to go bankrupt. As a result, $600 million of shareholder value was wiped out. Three thousand employees lost their jobs. Creditors lost their money. Customers lost refunds. Those employees didn’t just lose their jobs. They were tainted by the fact that they were associated with a company that was associated with fraud. I still get phone calls today from companies asking if people were associated with the Crazy Eddie fraud.

When people say they can separate themselves from a fraud that’s committed within a company and that it doesn’t affect them, it does affect them. It costs them money—money in raises, money in lost resources. They will carry that taint. If the company goes down, it will be on their resume that they worked at a company that was associated with fraud. It will cost them.

So, when you’re saying internal control is a cost to a company, it’s not a cost. It’s an investment. It not only prevents fraud, it makes a company cognizant of its own operations. It makes a company more knowledgeable of its own operations. It makes a business function better. It also helps creditors know that the company is keeping track of itself.

How can a small company get a good set of internal controls to improve its audits? Should they be using the COSO framework?

I fully support COSO. There are steps that they can take; smaller companies take smaller steps, bigger companies take bigger steps. There has to be an intelligent discussion based upon the scale of the company. The cost of internal controls should not exceed its benefits, I agree with that.

There have been recommendations to reform Sarbanes-Oxley to increase auditor reliance on management internal control representations. But the people administering the internal controls structure within companies don’t have enough independence for such reliance by auditors, since they are paid by management.

There have been calls for an exemption for companies under a certain market cap. Crazy Eddies had a $40 million market cap going out of the box. Big frauds start small.

You don’t think auditors have the skills to spot a fraud, even now, post-Enron?

Absolutely not. Look at the accounting curriculums. I’ve visited over 25 universities in the last two years making speeches. Most of the time, accounting students take fraud as an elective. They never take a course in securities fraud prior to graduating college. They never take a specific course on internal controls. It’s covered maybe on an afternoon in their auditing course. They never take a course in criminology. They never learn what motivates criminals to do what they do. There’s an education disconnect right now. We have to start looking towards prevention. We need well-trained auditors who are taught to prevent crime.

What should be done about it?

The SEC and PCAOB for public companies, and the AICPA for private companies, can mandate that the personnel on all audits have certain minimum levels of education. That would force local state licensing boards to have colleges change their curriculums to address deficiencies. The AICPA can address the continuing education deficiencies immediately by setting up appropriate guidelines. The colleges and universities recently expanded the amounts of credits for a student to graduate with a major in accounting from 120 credits to 150 credits, but did not address any of those issues.

The overall awareness of fraud must have improved since the days of Crazy Eddie, hasn’t it?

It’s improved, but only half-steps have been taken. We took steps in 2002 to strengthen the laws and now people are fighting to make it weaker. I’m not an enemy of the free market system; I’m for the free market system. I believe that the integrity of financial information is the main pillar of that system that benefits everybody. [But] until they’ve been a victim of the carnage, people do not understand the damage that bad internal controls can do, what the real costs are.

Do you think the SEC and the PCAOB are acting appropriately to enforce Sarbanes-Oxley and police against fraud?

I think they can do more by enforcing stricter educational standards. They have a golden opportunity today to take that next step which wouldn’t cost any money. I think it would push the educational institutions to be on notice that they have to keep up with the changing times. I think that this is the best solution. The Association of Certified Fraud Examiners has a free program for universities to learn more about fraud courses. There are plenty of organizations out there willing to help universities to offer fraud courses. They’re giving them as an elective now; I think they should be required.

You’ve also said that investors should receive even more disclosures than they do now. What else should companies disclose?

I don’t have the exact solution to that problem. But investors should have some kind of a projection as to when the cash flows are going to come, or some kind of a plan as to when the company is going to generate positive cash flows. Once a year, they should provide projections as to what their future revenues are going to be and how they’re going to achieve them. Also, any presentations made to analysts should be made available in real-time to investors on the company’s Web site. Why should certain people have access to those and not others?

Tell us what you’re up to these days.

I’m the CEO of Real Intelx, a company that acquires shopping centers and other commercial properties. I’m also a frequent speaker for professional organizations, government entities, and colleges and universities on white collar crime. I don’t accept any fees and I pay my own costs. I’ve assisted the Association of Certified Fraud Examiners and the American Institute of Certified Public Accountants in developing educational materials on fraud. I plan on nominating myself to the Public Company Accounting Oversight Board Advisory Group that advises the Board on the establishment of auditing and related professional practice standards.

Thanks, Sam.