Last week, I featured former Crazy Eddie CFO Sam E. Antar's website as an exceptional source of information about corporate fraud from a former fraudster himself. Today, I am happy to bring you the first part of an interview with Mr. Antar. I asked him a few questions about the psychology and motivation of fraud. His responses provide tremendous insight into the mind of a criminal. For more information, be sure to visit his website.Zac Bissonnette: You state on your website that greed and money are the motives for fraud. A lot of people look at fraudsters and say: 'There is so much intelligence and creativity there that they could so easily have done something legit.' Why do people commit fraud?
Sam E. Antar: You need to analyze white collar crime by its basic elements and outlined by the fraud triangle:
1. Incentive -What does the criminal expect to receive for committing their crimes? For example, an underlying incentive is greed for more money and power. Our incentive was both greed and power.
2. Opportunity - Can the criminal successfully commit their crimes? Lack of adequate oversight, internal controls, accountability, and effective audits present opportunities for the criminal
3. Rationalization - The criminal believes that they can effectively commit their crimes and reasons that they do not live by the same accepted norms and standards of society. They reason that for instance they are allowed to steal money because of personal financial problems whether perceived or real. However, in the Crazy Eddie frauds we had no rationalization. We committed our crimes simply because we could and did not care about our victims.
4. Capability - The criminal must have the requisite education, skills, knowledge, and experience to be capable of effectively committing crime.
The Crazy Eddie fraud can be divided into four periods:
1. 1969-1979: As a private company the primary incentive and motivation to commit fraud was to avoid income taxes and steal sales taxes through skimming. In addition we paid many employees "off the books." The company was highly profitable
2. 1980 -1983: We decided to legitimize the business with the goal of going public. The incentive was to make money selling shares to the public. Therefore, we skimmed less money each year and slowly converted everyone paid "off the books" to being paid fully "on the books. We "grossed up" their paychecks to compensate them for their extra individual taxes in order to help them receive the same net pay. As we gradually reduced the amount skimmed during those years our "reported profits" grew faster than our "actual profits." The company was still very profitable but most of the growth came from opening new stores and not existing stores. The effect of the gradual reduction in skimming made it appear that the company was growing faster because of opening new stores and higher existing store growth too.
At that point the Antars in control of Crazy Eddie could have stopped the fraud and probably would have gotten away with it, as skimming is very hard to detect. There were discussions within the family to now run the company legitimately. It was not a morality discussion. Many in the family felt that they made millions tax free from the skimming and more from cashing out their stock when the company went public. It was strictly a "business" decision based on how much, if any, additional fraud we should engage in to line our pockets. We decided to commit additional fraud.
The last two phases of the fraud were different in execution because now as a public company the incentive would be to artificially inflate profits to sell stocks at inflated prices, whereas if we had been a private company our incentive was to understate income to avoid taxes.
3. 1985 -1986: Crazy Eddie was a profitable public company and we fraudulently manipulated our profits higher (inventory fraud, etc.) so the Antar family could sell stock at inflated prices.
4. 1987: Crazy Eddie was no longer profitable. We tried to turn losses into profits or reduce the extent of our actual losses by manipulating earnings (inventory, accounts payable, etc.)
Zac Bissonnette: Is there some motive behind fraud other than greed?
Sam E. Antar: Based on my answer above, we continued to commit fraud despite the fact that the Antar family could have stopped when it went public and still have been multi-millionaires. The answer for the reason we committed our fraud was simple "out and out" greed and our quest for more power. We had no rationalization because we lacked excuses. We committed our fraud simply because we could. We had no effective internal controls, effective oversight within Crazy Eddie, and the external independent auditors were simply ineffective. The Wall Street firms that underwrote our public offerings did inadequate due diligence. The lack of certain factors such as effective internal controls, effective oversight, effective external audits, and lack of adequate due diligence by Wall Street underwriters gave us the opportunity to commit our crimes.
Zac Bissonnette: What does it feel like when you are in the act of defrauding someone? Is it a rush of excitement or guilt?
Sam E. Antar: There were no sleepless nights because of any guilt. Never during my 16 years at Crazy Eddie did I feel guilt or did I have a conversation or even witness a conversation where guilt was discussed. There was no rationalization for what we did, no excuses, just plain greed from the fact that we could effectively commit our crimes. We were "cold blooded" criminals who never had any concern about the harm we would cause others.
Zac Bissonnette: What kinds of compensation systems for executives encourage fraud? Is it practical to set up a performance-based compensation system that does not reward fraud?
Sam E. Antar: First, you can never eliminate fraud since human beings are by nature sinful and always subject to temptation. The problem with eliminating every incentive for fraud is that it may also likewise eliminate incentive for productive behavior. It is as if we decided to outlaw all stock trading to eliminate stock fraud.
Therefore I support performance based compensation. However, certain people in certain "oversight" positions such as Board members and especially so called "independent" Audit Committee members should not receive stock options and other forms of earnings based compensation.
I believe that any individual within the accounting hierarchy in companies such as CFOs, Controllers, accounting staff and internal auditors too should not receive earnings based compensation such as stock options. Those people above who I suggested should not receive earnings based compensation can receive performance based compensation that is not directly tied to reported earnings but instead to certain productivity parameters such as measuring the effectiveness of their work.
Zac Bissonnette: Do you see the compensation systems that reward executives for the short-term performance of the stock as an incentive to "manage earnings" or mislead investors? Are bonuses based on certain internal performance measures better than stock options?
Sam E. Antar: Any earnings based compensation will provide executives incentive to manage earnings. However, if will eliminate such compensation from company Boards, Audit Committees, most of the internal accounting and internal control hierarchy we should be able to reduce most frauds without eliminating needed incentives. To eliminate earnings based compensation entirely would be counter productive since the operational aspect of the business such as sales etc, requires such incentives to achieve maximum effectiveness.
We can reduce the temptation to commit fraud by changing how earnings based compensation is rewarded For example, it can be long term based and include effective "claw back" provisions if the earnings are a result of fraud. As a minimum any member of the so-called independent Audit Committees and the full board of Directors should not own stock or receive any earnings based compensation in the company whose board they serve on. How can such Audit committee members own stock and have stock options and still be independent when the external auditors they oversee cannot own stock in clients they audit?
As discussed in your prior question, certain individuals in accounting, oversight, and control functions can receive certain internal performance based compensation.
One person can reason that they will abide by every law and social norm except that they will speed their cars on highways endangering people. That person makes a choice of breaking a social taboo like driving a car 50 miles over the speed limit and breaks some non-criminal laws. However, such a person may never steal money from any one. The white collar criminal by their criminal acts shows a higher level of indifference to society's laws and norms. He does not have the self imposed barrier of not permitting his activities to cross in the realm of criminality.
Do you have questions for Sam Antar? Post them here and if there's enough, we can do a follow-up interview.
The last two phases of the fraud were different in execution because now as a public company the incentive would be to artificially inflate profits to sell stocks at inflated prices, whereas if we had been a private company our incentive was to understate income to avoid taxes.
3. 1985 -1986: Crazy Eddie was a profitable public company and we fraudulently manipulated our profits higher (inventory fraud, etc.) so the Antar family could sell stock at inflated prices.
4. 1987: Crazy Eddie was no longer profitable. We tried to turn losses into profits or reduce the extent of our actual losses by manipulating earnings (inventory, accounts payable, etc.)
Zac Bissonnette: Is there some motive behind fraud other than greed?
Sam E. Antar: Based on my answer above, we continued to commit fraud despite the fact that the Antar family could have stopped when it went public and still have been multi-millionaires. The answer for the reason we committed our fraud was simple "out and out" greed and our quest for more power. We had no rationalization because we lacked excuses. We committed our fraud simply because we could. We had no effective internal controls, effective oversight within Crazy Eddie, and the external independent auditors were simply ineffective. The Wall Street firms that underwrote our public offerings did inadequate due diligence. The lack of certain factors such as effective internal controls, effective oversight, effective external audits, and lack of adequate due diligence by Wall Street underwriters gave us the opportunity to commit our crimes.
Zac Bissonnette: What does it feel like when you are in the act of defrauding someone? Is it a rush of excitement or guilt?
Sam E. Antar: There were no sleepless nights because of any guilt. Never during my 16 years at Crazy Eddie did I feel guilt or did I have a conversation or even witness a conversation where guilt was discussed. There was no rationalization for what we did, no excuses, just plain greed from the fact that we could effectively commit our crimes. We were "cold blooded" criminals who never had any concern about the harm we would cause others.
Zac Bissonnette: What kinds of compensation systems for executives encourage fraud? Is it practical to set up a performance-based compensation system that does not reward fraud?
Sam E. Antar: First, you can never eliminate fraud since human beings are by nature sinful and always subject to temptation. The problem with eliminating every incentive for fraud is that it may also likewise eliminate incentive for productive behavior. It is as if we decided to outlaw all stock trading to eliminate stock fraud.
Therefore I support performance based compensation. However, certain people in certain "oversight" positions such as Board members and especially so called "independent" Audit Committee members should not receive stock options and other forms of earnings based compensation.
I believe that any individual within the accounting hierarchy in companies such as CFOs, Controllers, accounting staff and internal auditors too should not receive earnings based compensation such as stock options. Those people above who I suggested should not receive earnings based compensation can receive performance based compensation that is not directly tied to reported earnings but instead to certain productivity parameters such as measuring the effectiveness of their work.
Zac Bissonnette: Do you see the compensation systems that reward executives for the short-term performance of the stock as an incentive to "manage earnings" or mislead investors? Are bonuses based on certain internal performance measures better than stock options?
Sam E. Antar: Any earnings based compensation will provide executives incentive to manage earnings. However, if will eliminate such compensation from company Boards, Audit Committees, most of the internal accounting and internal control hierarchy we should be able to reduce most frauds without eliminating needed incentives. To eliminate earnings based compensation entirely would be counter productive since the operational aspect of the business such as sales etc, requires such incentives to achieve maximum effectiveness.
We can reduce the temptation to commit fraud by changing how earnings based compensation is rewarded For example, it can be long term based and include effective "claw back" provisions if the earnings are a result of fraud. As a minimum any member of the so-called independent Audit Committees and the full board of Directors should not own stock or receive any earnings based compensation in the company whose board they serve on. How can such Audit committee members own stock and have stock options and still be independent when the external auditors they oversee cannot own stock in clients they audit?
As discussed in your prior question, certain individuals in accounting, oversight, and control functions can receive certain internal performance based compensation.
One person can reason that they will abide by every law and social norm except that they will speed their cars on highways endangering people. That person makes a choice of breaking a social taboo like driving a car 50 miles over the speed limit and breaks some non-criminal laws. However, such a person may never steal money from any one. The white collar criminal by their criminal acts shows a higher level of indifference to society's laws and norms. He does not have the self imposed barrier of not permitting his activities to cross in the realm of criminality.
Do you have questions for Sam Antar? Post them here and if there's enough, we can do a follow-up interview.
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