Case Study: Crazy Eddie Inc

The crazy Edie case highlights some of the common accounting fraud cases that are

concealed by companies to deceive investors and the public by creating a good impression about

a company’s performance. It is the responsibility of the auditors to uncover such cases of

fraudulent financial reporting and misappropriation of assets. However, collusion between the

employees and the auditors hinder such financial irregularities committed by corporations go

undetected. Several key financial ratios can uncover such financial risks when investing in such

companies (Gadoiu, 2014).

Liquidity rations

It includes current ratio and the quick ratios. These ratios indicate problems or significant

risks with a company or corporation. (All values are in 000’s)

1. Current ratios= current assets/current liabilities

For March 31 1984

=27836/29972

=0.928

For March 1 1987

=261861/108827

=2.406

2. Quick ratios= current assets-inventory/current liabilities

For period ending March 31 1984

=261861-109072/108827

=1.403

For March 1 1987

 =27836-23343/29972

=0.149

Comparing the two ratios between 1984 and 1987 count hint a concern on manipulation

of involved accounts on Crazy Eddie Inc (Brentani, 2004).

Activity ratios

They include the receivable turnover, which indicates the effectiveness of a corporation

in debts collection and extension. It also indicates how effective does a company utilize its

assets. Inventory turnover indicates times in which an inventory is sold or used in yearly basis

and asset turnover. These ratios are important in determining if an inventory is overstated like the

case of crazy Eddie Inc.

3. Inventory turnover=cost of goods sold/inventory

(On march 1, 1987)

==272225/109072

=2.495

(On march 1, 1984)

=106934/23343

=4.58

4. Assets turnover=sales/fixed assets

(On march 1, 1987)

352523/294858

=1.196

(On march 1, 1984)

137285/36569
 =0.3769

Profitability ratios

They include the net profit margin. Gross margin, return on investment. These ratios are

useful in determining if the profits reported by the company are reasonable.

5. Gross profit margin- gross income/sales

(On march 1, 1987)

=21097/352523

=0.0599

(On march 1, 1984)

7975/137285

=0.0581

6. Net profit margin=net income/sales

(On march 1, 1987)

=10596/352523

=0.03

(On march 1, 1984)

=3773/137285

0.0275

Eddies Antar leadership style

The crazy Eddie case illustrates different type of leadership styles that exists in business

environments. Eddie demonstrated autocratic type of leadership style, which can be judged,

based on his actions. In the type of style of leadership, managers depend on communication from

high or senior management to meet the company’s goals and objectives. The leaders are directly
involved in motivating the employees to ensure they maintain high productivity and visibility.

For instance, Eddie would directly give orders on his employees on how they handle customers

and at some point would not allow his clients to leave his shop empty-handed. In addition,

Autocratic leaders are much concerned on the bigger picture of the organization and that can be

demonstrated on the extent at which he went to conceal bad performance in the company to

maintain a god impression to the investors and the public. This includes directing his employees

to overstate inventories and restock them up during audits to conceal what was actually poor

performance of his company (Cherry, 2006).

Hiring of relatives in executive positions

Hiring of relatives in executives has several consequences in performance and the

perception of the company. Hiring relatives can cause conflicts of interests, favoritism and

partiality treatment, which can reduce the morale of other employees in performing their duties

and responsibilities as, required. The hiring of relatives by Eddie significantly led to the fall of

the company and concealing of Fraud for such a long period. The hiring of relatives was

deliberate efforts to commit accounting fraud and avert justice. He sponsored his brother’s

education in accounting to help aid in the fraud scheme. Although family business still thrive and

do well, majority do not hire family members and relatives on executive positions to avoid such

situations (Fu, 2015).

References

Gadoiu, M. (2014). Advantages And Limitations Of The Financial Ratios Used In The Financial

Diagnosis Of The Enterprise. Scientific Bulletin-Economic Sciences, 13(2), 87-95.

Brentani, C. (2004). Financial statement analysis and financial ratios. Portfolio Management in

Practice, 149-163. doi:10.1016/b978-075065906-2.50010-7

Cherry, K. A. (2006). Leadership styles. myweb. astate. edu/bounds/AP/Leadership/Styles,

accessed.

Fu, I. (2015). Favoritism: Ethical Dilemmas Viewed Through Multiple Paradigms. The

Journal of Values-Based Leadership, 8(1), 6.