The stereo headphone industry is created by John C. Koss in 1958 with his first stereo headphone. Koss Corp. was incorporated in 1971 in Milwaukee, Wisconsin and manufactures stereo headphones, speaker phones, computer headsets, telecom headsets, noise reducing headsets, and wireless headsets. Koss Corp. went public in 1965 at $5 per share. Over the last ten years, its stock price has ranged from $8 in July 2002, to its peak at $15 in July 2006 to its low at $4 in July 2010. It currently trades at approximately $5.50 per share.The Chief Executive Officer (CEO), Michael J. Koss, the founder’s son, and his family directly or indirectly own in excess of 70 percent of the company’s 851,000 shares. A $34 million embezzlement of cash from the Koss Corp. occurred over a 12 year period from 1997 through December 2009.
The Koss Corp. received an unqualified opinion on its financial statements as of June 30, 2009 and 2008 (as well as in prior years) by a Big Five auditing firm. The audit did include consideration of internal control over financial reporting as a basis for designing audit procedures that were appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Koss’s internal control over financial reporting.
The Company maintains a system of internal controls to provide reasonable assurance that assets are safeguarded and that the book and records reflect the authorized transactions of the Company. Oversight of management’s financial reporting and internal accounting control responsibilities are exercised by the Board of Directors, through an Audit Committee that is comprised solely of independent directors.
The SEC on October 24, 2011 filed a Complaint against, and proposedsettlement with, Koss Corporationand Michael J. Koss, its CEO and former CFO, based on Koss Corporation’s preparation of materially inaccurate financial statements, book and records, and lack of adequate internal controls from fiscal years 2005 through 2009. During this period, SujataSachdeva, Koss’s former Principal Accounting Officer, Secretary, and Vice-President of Finance, and Julie Mulvaney, Koss’s former Senior Accountant, engaged in a wide-ranging accounting fraud to cover up Sachdeva’s embezzlement of $34 million from Koss. 2.0
ISSUES OF CONCERN
Question 1: What is the problem in the Koss Corporation case? The main problem in Koss Corporation case is that a $34 million embezzlement of cash from the Koss Corp. occurred over a 12 year period from 1997 through December 2009. During this period, SujataSachdeva, Koss’s former Principal Accounting Officer, Secretary, and Vice-President of Financial, and Julie Mulvaney, Koss’s former Senior Accountant, engaged in a wide-ranging accounting fraud to cover up Sachdeva’sembezzlement of $34 million from Koss to pay for Sachdeva’s personal purchases (lavish shopping sprees at Neiman Marcus among others).
Koss Corp. said that SujataSachdeva did it by authorized abundant wire transfers of funds from Park Bank account maintained by Koss to pay for her American Express credit card bills. In addition, Koss also said that law enforcement authorities have seized at least 22,000 items, including high-end women's clothing, shoes, handbags, and jewelry as part of the investigation.
For the first fiscal year, believed that Sachdeva misappropriated funds was the year ending June 30, 2005, and the company estimates the total amount of unauthorized transactions was $2,195,477. The following years, in chronological order, the amounts were: fiscal 2006, $2,227,669; fiscal 2007, $3,160,310; fiscal 2008, $5,040,968 and fiscal 2009, $8,485,937.In fiscal 2010, which started July 1, 2009, the unauthorized transactions totaled $5,326,305 during the first quarter and $4,917,005 in the second quarter.
The estimated unauthorised transactions is shown in table below where we can see that SujataSachdeva started with a relatively small amount and increased...
References: 1) Joseph A. Gerard PhD CPA Curt M. Weber JD. 2014. How Agency Theory Informs a $30 Million Fraud. Journal of Finance, Accounting and Management, 5(1), 16-47.
2) Annoy. 2010. Koss: Unauthorized transactions increased over years. Bussiness journal.
3) Small company suffers massive embezzlements. 2010.
4) Koss Executive Accused of Embezzling Company Funds to Pay Off Shopping Spree. 2009.
6) Expert in Koss Case Blames Michael Koss and Management for Fraud. 2013.
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