Frameworks & Finance

Get smarter in 5 minutes a day.

7 ways to protect your business from fraud

companies fraud Apr 05, 2023

Before you start reading, I'd love to hear from you!

Could you click reply on this email and answer 3 questions for me:

  1. What company do you work for?
  2. What is your position at the company?
  3. What is the biggest numbers related frustration you have right now?

Based on the responses, I plan to jump on a few calls to discuss the frustrations you're having. I'm looking to build a course and want to use YOUR feedback to gear it to the needs YOU have.

Now, onto the craziest story of fraud I've ever heard!

If you were forwarded this email, my goal is to share one thing each week that changes the way you think about money. Subscribe below:

Subscribe Now
A message from The Average Joe

IKEA Instructions for Investing

Assembling IKEA tables got you feelin’ like the Steph Curry of furniture?

The Average Joe will turn you into the Marie Kondo of investing. Organized, calm and ready to conquer the markets.

Their newsletters are the “IKEA instructions for investing” — short, simple and concise — and filled with market trends and insights.

But you don’t read IKEA manuals on your spare time and you wouldn’t read financial publications for fun.

Until now…

7 ways to protect your business from fraud

In 1969, Eddie Antar founded his consumer electronics retailer, Sight and Sound, with his father and cousin. The next year, the cousin sold his 1/3 share to Eddie, putting him in control of 2/3 of the company.

Eddie immediately became known for his aggressive selling tactics and got the nickname “Crazy Eddie.” In 1971, they changed the name of the store to “Crazy Eddie.”

During those early years, Eddie couldn’t afford to run TV ads, so they chose to partner with a local radio disc jockey to run radio ads instead.

The ads had a very particular style to them, ending with “OUR PRICES ARE INSANE.”

Up late one night, Eddie noticed that the overnight TV advertisements were lacking, so he decided to start running TV ads overnight, since he couldn’t afford the more expensive daytime ad slots. The ads are a gem, you should definitely watch them.

This one bet helped them open over 40 stores by the mid to late 70s and embedded them in the cultural consciousness of the NE US.

But things were never as they seemed.

From very early on, Crazy Eddie and his team had all sorts of schemes to make more money and report less as income.

As the fraud became bigger, it became harder to hide. So, to “resolve” this, they decided to take the company public. They started preparing for this in 1979 and eventually went public in September 1984.

To make the math work, Eddie started skimming less money, which made profits look great! Between 1980 and 1983, reported profits increased by 171% as actually profits only increased by 13%. He had investors fooled and ready to invest.

The shares started at $8 and by 1986 had reached over $75. This large increase allowed Eddie and family to take cash out. By early 1987, most of the Antar family had sold most of their Crazy Eddie stock, pocketing $90 million in proceeds (equivalent to $240 million today).

Immediately following the cash out, the fraud started to come unraveled. Where they’d previously been able to show profits, now they weren’t.

The stock went from $75 back down to $5 per share.

But, this wasn’t the ultimate downfall of the company… the firing of Arnold Spindler and Abe Grinberg was. They knew about the fraud, so when fired they went to the SEC.

While the SEC only investigated a small scope, the fraud was much larger.

If there was a type of fraud, the Antar’s probably did it.

  1. Collecting, but not paying sales tax.
  2. Faking store fires & floods to collect insurance money. They even kept the ruined inventory and moved it from store to store, collecting on it 2, 3, 4, or even 5 times.
  3. Paying employees off the books.
  4. Faking sales to show top line growth.
  5. Chargebacks to vendors to reduce accounts payable.
  6. Fake and manipulate inventory records during audits.
  7. Overstating inventory to the 10s of millions of dollars.
  8. Skimming cash for personal use.

So, how was he not caught sooner?

A combination of good instincts, siloed knowledge, charming the right people, and family members helping with the coverup.

This story while extreme, highlights how easy it is for us to overlook fraud looking us right in the eyes.

We did it with Enron, FTX, and many many more.

So, how can we set up our business in a way to prevent fraud from happening?

7 ways to proactively prevent fraud

Implement segregation of duties

This is a core accounting principle that is often really hard in small to medium businesses.

The idea is this: more than one person should touch all accounting transactions.

Receiving the money? You shouldn’t be recording it and reconciling it.

By including more people in each transaction, you limit the ability to commit fraud without detection.

Along with this, create policies and set approval limits that are followed consistently.

& have good IT hygiene

I’ve seen too many good accounting procedures get wasted because of a shared log-in.

If Joe deposits the money and Sally records it in the system, Joe and Sally shouldn’t know each other's passwords.

It’s so easy to think this isn’t a big deal, but it isn’t until it is.

Setup unique log-ins for all users and make sure everyone keeps their passwords security.

I love password managers because they make it so easy to not reuse and not write down our passwords.

Internal & external audits

I don’t tell you to audit to catch fraud. Sure, sometimes they can, but sometimes they won’t.

In my opinion, the real value of an audit is the forcing mechanism to improve your system.

It’s through the procedure of pulling transaction data that you see things you couldn’t see before.

Audits are stress tests.

They stress test your web servers to simulate a lot of traffic.

They stress test your body to see how your heart performs.

They stress test vehicles to see how they perform in collisions.

You should stress test your accounting to see how your processes and procedures hold up.

Review transaction-level detail monthly

In some way, this is you stress testing the system.

I’m of the opinion that no matter how big you get, you should always do some sort of review on the underlying transaction data.

When looking at the information, look for:

  1. New vendors
  2. Unrecognized transaction
  3. Appropriate documentation
  4. Did it follow the procedure?

Not only will you learn a lot about your business, but it also shows others that you’re plugged in.

Do you think an employee who has had to pull transactions because the CEO asked for it is likely to steal money?

I doubt it.

Create a company budget & review financials monthly

Budgets create an expectation of what is supposed to happen.

When looking at financials, it helps highlight irregularities.

Combine this review with transaction-level questions and you have a strong foundation.

You want to look for:

  1. Irregularities between statements (Income Statement, Balance Sheet, Reconciliations, etc)
  2. Differences in spending compared to budget
  3. Any drastic Asset or Liability change
  4. Anything that looks inconsistent

Don’t be shy about asking questions. It’s important to ask now because in a month you will forget.

Emphasize integrity in company culture

You want your employees to take on the identity of integrity.

You can do this by:

  • telling stories that highlight it
  • being consistent in your display of it

Regular communication is needed to remind people what you stand for, but your actions need to align with your message. Employees need to see you respond consistently when someone acts in a way that doesn’t align with values.

Provide a reporting mechanism

When you establish a culture of integrity, this is a natural next step.

But that alone isn’t enough. People need to:

  • feel comfortable reporting something they see
  • have an easy mechanism to report it

Saying “my door is always open” is not sufficient.

For people to feel they can report, they need to have confidence they won’t get punished for reporting.

Anonymous surveys, hotlines, or an HR procedure are a great way to encourage reporting breaches.

Wrapping up

No one thinks fraud will happen to them (and they're likely right).

While I don't have extensive experience with fraud, I've heard too many 2nd and 3rd hand stories about life-long friends stealing hundreds of thousands (or even millions) from a business owner over 5 to 10 to 15 years.

Complacency in this not only opens you up to fraud, but it opens you up to a poorly run company. The signal that is sent by proactively watching your business creates an atmosphere of teamwork and efficiency.

You don't have to implement all of the above, but I'd encourage you to reflect and ask: what's the lowest hurdle I can cross tomorrow? Get started.

Something Interesting

  • Want to get the hottest stock ideas delivered to you every morning? 360 Wall Street is trusted by over 100,000 to make better-informed trading decisions. Subscribe today to get the hottest stocks delivered FREE to your inbox.
  • If you enjoyed the Eddie Antar story above, you will love the book “Retail Gangster.” It’s entertaining and packed with lessons, even if you’re not in accounting.
  • If you’re a golf fan, you know today marks the start of one of the best golf weeks of the year (The Masters Tournament). The former maintenance worker tells a crazy story about them replacing sod right before play. Also, hilarious that they blacked him out and altered his voice to protect his identity. Augusta National is serious business. 😂

What did you think of this week's edition?

Login or Subscribe to participate in polls.

If you have questions, feedback, or want to work with me, reply to this email. I reply to all emails and would love to get to know all of you!

See you next week,



Level-up your business finance knowledge in 5 minutes a week

Join 20k+ business owners and leaders how to read financial statements and grow their business every Thursday.

You're safe with me. I'll never spam you or sell your contact info.