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In his blog today, Jeff Matthews writes an interesting yarn about offshore asset shuffling by Merck (NYSE:MRK). Jeff says the whole thing reminds him of one of the all-time great accounting swindlers, Sam Antar, who was CFO of Crazy Eddies. (That was a New York electronics chain run by his brother, Eddie.) Here's what Sam, now a reformed criminal who has his own website, whitecollarfraud, writes to Jeff:

When God forbid a plane crashes the Federal Aviation Authority will investigate the accident in minute detail, make recommendations, and seek to have changes made so that measures are undertaken to prevent future accidents.

Unfortunately, the same does not apply to the issue of white collar crime. I would have to believe that most persons at the internal revenue service who investigate such tax matters are accountants (majored in college) and CPAs.

The problem begins with their education during their college years as they seek to graduate with a major in accounting and hope to eventually become CPAs.

Most accounting students never take a fraud course in college, let alone a specific course in securities fraud or internal controls. Many other key important subjects such as the above and are covered on the CPA exam. However, accounting students must learn these areas in a CPA (cram review course) since they never learn such subjects in college. In addition they never learn about criminology (which is not covered on the CPA exam).

If these accounting students eventually become CPAs, the current recommendation of the American Institute of Certified Public Accountants is that they take only 10% of their continuing education course credits in the area of fraud (at most 4 hours a year of a 40 hour per year continuing education requirement.

In fact many states require CPAs to take more ethic courses than fraud courses as they continue in the profession and meet their required continuing education requirements. Personally speaking, ethics courses do not change “would be” criminals to “to become clean” and is no more a means of “preaching to the choir” for the overwhelmingly honest people taking such courses.

With the above issues in mind I can address your question:

“So I have to ask this: why did it take the U.S. so long to get “alarmed” at this kind of stuff”?

The issue is fundamental to the education that accounting students get in their formative years in college as they seek to enter the profession whether at CPA firms, government (for example the IRS), private industry, and the nonprofit sector.

As major frauds come and go, whether they are financial frauds or tax fraud, most of the detail information about these schemes is never communicated to the profession at large. Worse yet few steps are taken to prevent future scams based on the information obtained from investigating these crimes.

So you write:

“I’d suggest asking Sam E. Antar, the former Chief Financial Officer of one of the all-time great accounting scams—Crazy Eddie.”

Criminals always have the initiative and the professions approach to preventing fraud (whether as CPAs ay accounting firms, accountants in government, the private sector, and nonprofit sector) is “process oriented” rather than the criminal who approaches his work in a judgmental way.

Therefore, the criminal has the fundamental advantage against the under informed, not very well trained accounting profession in regards to combating white collar crime.

For example in the Crazy Eddie fraud, the auditors did not observe the year end inventory at all store and warehouse locations. We new in advance what locations would be observed or tested by the auditors as to accuracy. In this aspect of our fraud we simply increased the value of our inventory in the locations that the auditors did not observe – plain and simple.

A recent article by Joseph T. Wells in the Auditor’s Report entitled “What Accounting Students Need to Know about Fraud” published in their Summer 2006 edition told about a fraud committed by a company named “Phar-Mor” about 15 years after the Crazy Eddie fraud:

“…in the $500 million Phar-Mor fraud, auditors only tested a handful of stores out of 300. But they advised management months in advance on which stores would be tested. Not surprisingly, the selected stores were squeaky clean.”

You would think that most accountants would be have learned the lesson of the Crazy Eddie fraud – count all inventory locations and count them all simultaneously. Both accounting firms that audited Crazy Eddie and Phar-Mor were among the “big 4” accounting firms today. The gatekeepers (our audit firms) learned very little and the criminals once again out foxed them.

The same issue can be applied to the government accountants many of whom learn little about the details of previous fraudulent schemes (tax fraud or financial fraud) that affect their responsibilities.

I doubt today that intricate details about happened with regards to Merck’s tax issues, whatever fraud were committed at companies like WorldCom, Enron, Phar-Mor, and other countless companies will ever reach most of our future accountants under the cautionary subject ”lessons to be learned.” Very few steps will be taken with regards to legislation, auditing rules and procedures, and education to prevent future frauds such as the above from happening again.

After all most accountants think in terms of complying with “out-dated” audit programs (process oriented) and criminal’s who always have the “initiative” will be ever more thoughtful in thinking of new schemes and worst yet continue to use old schemes as they outwit the both government auditors and public accounting firms.

There is a wise saying “know thy enemy.” Until accountants in and out of government better understand issues of fraud and criminality there can be no effective prevention.

You wrote:

“Actually, I’d bet the ranks of companies that engage in same kind of offshore asset-shuffling tax-minimization that the Merck guys used include nearly every member of Fortune 500, and a few others too boot.”

You are probably correct. However, when you mention this issue and how I handled the question about minimizing taxes at a Wall Street conference a major tax fraud committed by Crazy Eddie over a 15 year period comes to mind.

For almost 15 years the Antar family (Eddie Antar, his father Sam M. Antar and other members of their family) skimmed over $15 million from Crazy Eddie. No one ever knew about this fraud until disclosed by me after the government had investigated the case for two years and cornered me into “cooperating.”

Today we have an underground economy in proportion to the Gross Domestic Product as large as it ever was during the hey-day of our skimming from the company in the 1970’s and 1980’s.

So when you aptly ask about the Merck tax scheme:

"That was twenty years ago. So I have to ask this: why did it take the U.S. so long to get 'alarmed' at this kind of stuff?"

And you write:

"I’d suggest asking Sam E. Antar...."

I say to you that the Sam E. Antar of twenty years ago (I am not a criminal today) would be just as successful in today’s environment.

Other than Sarbanes-Oxley and its limited reforms (which many misguided detractors are trying to weaken today), little progress has been made in the culture and attitude of the accounting profession (in private industry or government) regarding white collar crime.

That is why in a head to head battle with the “evil genius of Sam E. Antar of yesteryear” they would still be no match for me today.

Remember that most financial frauds are still uncovered today as a result of informants and not as a result of any proactive action by accountants and auditors in and out of government. Worst of all such frauds are caught AFTER major collective damage has been inflicted on the innocent.

Respectfully, Sam E. Antar “is not making this up” too.

Which is why I continue to do what I do.

Source: Merck's Offshore Shuffling: Shades of Crazy Eddie