Premium Essay

Koss Corporation

In: Business and Management

Submitted By raddcar
Words 1214
Pages 5
Koss Corporation
Part A The overall control environment at Koss Corporation in the years leading up to the fraud was inadequate. The structure of the Board of Directors was poor and the management did not place enough importance on financial reporting. These reasons allowed Ms. Sujata Sachdeva easily make unauthorized wire transfers, without being caught by either the management or the auditors – the people responsible for detecting fraud. The poor structure of the Board of Directors was one of the main reasons that the unauthorized transactions went unnoticed. First, there was only one person managing and assessing the internal control system. According to the Sarbanes-Oxley Act (SOX), non-accelerated filers require the CEO and CFO to separately perform an assessment on the internal controls over financial reporting (ICFR). However, in the case of Koss Corporation, both the CEO and CFO were the same person – Michael Koss. Therefore if he implemented a defective the internal control system, there was nobody there to correct him. Furthermore, the company’s auditor, Grant Thornton, was not required to, nor did they assess the effectiveness of the ICFR. They simply designed their audit of financial statements based on the manager’s report of the ICFR. Consequently, if Michael Koss incorrectly told Grant Thornton that the company had an effective ICFR, Grant Thornton probably designed a financial statement audit with little skepticism. Another problem with the structure of the Board of Directors was the lack of independence. Five out of the six members had been on the board for on average of 32 years, instead of changing members every few years. This violated one of the key elements of having an effective control environment as stated by COSO (Committee of Sponsoring Organizations of the Treadway Commission). As a result, Ms. Sachdeva knew the board well enough to...

Similar Documents

Premium Essay

Koss Corporation

...1. I believe that the Principle Accounting Officer should also be required to attest to the effectiveness of internal controls over financial reporting, in addition to the CEO and CFO. In many corporations, the PAO is also the CFO, and because of their CFO role, are required to attest to the effectiveness of internal controls over financial reporting. In the Koss Corporation, Michael Koss held the roles of both CEO and CFO, so he was the only person required to attest to the effectiveness of internal controls over financial reporting. Whenever the sole responsibility of oversight lies on one person, the risk of fraud increases. Had there been two separate parties required to attest to the effectiveness of internal controls over financial reporting, collusion would have had to occur for both parties to attest falsely that the internal controls were effective over financial reporting. 2. The auditor should assess inherent risk at a higher level when one individual holds multiple C-level positions and Board of Director titles. Inherent risk is the susceptibility of an account or class of transactions to material misstatement assuming no related controls. Accounts that are more liquid or involve complex computations or estimates have a higher inherent risk. In the same manner, in situations where the full power of control rests on one person, auditors should assess inherent risk as higher. When a single person has control of two or more executive or leadership roles,......

Words: 568 - Pages: 3

Free Essay

Student

...Introduction My report is built around SEC Accounting and Auditing Enforcement Release AAER-3330 Koss Corporation. Before I dive into AAER-3330 let me begin by giving some information into Koss Corporation. John C Koss founded the J.C. Koss Hospital Television Rental Company in 1953. After a short time Koss was looking for new ideas, and partnered with Martin Lange to eventually develop a stereo headphone. Based in Milwaukee, Wisconsin, USA, in 1991 Koss Audio & Video Electronics started producing and selling consumer electronics products as a separate company in Hazelwood, Missouri, USA. The Koss family owns more than 75% of the firm. Having only a high-school education, John C Koss worked with Lange, an engineer, to develop the headphone that launched the company almost by accident, as they came upon the headphone idea as a result of an attempt to market a portable phonograph. Working out of 2 nearby locations in the early 1970s - one housing Koss TV-Rental, which also did electronics and musical instrument repairs - and their main facility 2 blocks to the east - Koss pioneered the high-end "electro-static" "ES series" headphone market. These headphones set the standard for wide-range frequency response; Koss also provide the bulk of headphones in supporting educational and library AV department equipment. Being very durable, they required service for wear & tear on cords and ear pads - and K&M Electronics (Klenworth & Midwest based in Minneapolis),......

Words: 1707 - Pages: 7

Premium Essay

Koss Case

...Q.1 In a circumstance similar to Koss Corporation, where the Principal Accounting Officier (PAO) is not also the CFO, we believe that the PAO should attest to the effectiveness of internal control. As we know, the main job of a PAO is to overseeing the company's accounting operations, which means regulatory compliance with accounting standards and developing financial strategies for the company with the CFO. In this way, the PAO has extensive knowledge of the accounting processes and control structures within the company. So it seems pertinent that the PAO makes an attestation on internal control effectiveness However, the Koss case is a bad example as the one perpetrating the fraud is the PAO. So the attestation from the PAO would be unhelpful in this case. To conclude, we believe that the position of PAO is a key matter on assessing internal control effectiveness. Q.2 When one individual holds multiple C-level and Board of Director titles over an organization it becomes a huge inherent risk to the auditor. "If we take the example of Koss, the company didn't properly segregate duties or assign someone outside to provide an independent check and balance on employees’ integrity and to maintain a sufficiently strong control system. " This is one of the reasons that led to fraud and embezzlement in the Koss Corp. So we can say that if one person is the CEO, CFO, and COO, the "power" is grouped on a single person. In fact, c-level represents the......

Words: 506 - Pages: 3

Premium Essay

The Fraud of Koss Corporation

...Koss Corporation filed a lawsuit in the Circuit Court of Cook County, Illinois against the company’s former Vice-President of Finance, Sujata Sachdeva, and Grant Thornton, LLP, its former auditor, alleging fraud and deceit, professional negligence and breach of fiduciary duty. The lawsuit stems from Koss’s discovery that Sachdeva had stole of more than $30 million from the Company in order to fund a lavish lifestyle complete with furs, jewelry and high-end clothing. Sachdeva embezzled the funds through a variety of means, including fraudulent cashier and traveler’s checks, fraudulent wire transfers, and unauthorized payments from petty cash. The Company further alleged that Grant Thornton, the company's auditor during those same years, failed to properly conduct its audits of the company's financial statements and failed to properly assess the company's internal controls, thus allowing the embezzlement to continue and the damage to the company to escalate. In particular, it claimed that Grant Thornton repeatedly assured Koss' management and its board that the company's internal controls were effective and that Koss could rely on those same internal controls and Grant Thornton's work. Grant Thornton fails to properly investigate, audit and report to the Koss board of directors and audit committee on Sachdeva’s embezzlement and fraud through (i) improper use of cashier’s checks drawn on Company accounts at Park Bank;(ii) improper wire transfers from company accounts at LaSalle......

Words: 378 - Pages: 2

Free Essay

Bose Company Overview

...COMPETING BY TRULY BEING DIFFERENT: COMPETING BY TRULY BEING DIFFERENT Company Background – The Sultan of Sound: Company Background – The Sultan of Sound In 2007 Forbes Magazine ranked Amar Bose, founder and CEO of Bose Corp., among the world’s wealthiest entrepreneurs and business leaders and named him as the 271st among America’s 400 wealthiest American billionaires. His success: his innate curiosity for the way things work (especially sound technology) and the constant need to improve and advance through study, research, and observation. When it comes to engineering, Bose affirms that his motto has always been about quality: "Do whatever it takes to make it better than it was before. If you do that, everything else [i.e., money] will come along." Dr. Amar Bose Company Background: Company Background Industry Information Address: The Mountain Framingham, Massachusetts 01701-9168 U.S.A. Statistics: Private Company Founded: 1964 Employees: 8,000 Sales: $1.1 billion (2000 est.) NAIC: 334310 Audio and Video Equipment Manufacturing Company Background: Company Background Product and Technology Specializes in manufacturing and installation of audio, home entertainment, automotive, aviation, space program, commercial setting ( stadiums, auditoriums, arenas, retail spaces and restaurants) Consumer Product Company Background: Company Background Bose Philosophy Company Background – Bose Perspective : Company Background – Bose Perspective Bose believes that audio products...

Words: 922 - Pages: 4

Premium Essay

Fraud in Ais

...the firms accounting system that assisted this embezzlement to last for a decade. Sue Sachdeva was the main accountant at Koss Corporation and it is estimated that she embezzled over 34 million dollars during that time. Sachdeva was able to embezzle this amount through wire transfers, checks, and credit cards (Whitehouse, 2011). The first failure was the age of the AIS. It is estimated that the system was almost 30 years old. There were two offers to purchase a new system and each time Michael Koss, the CEO, denied the request (Whitehouse, 2011). Koss was operating on an outdated accounting system and probably thought that it was okay because he had auditors come in and authenticate the work it did. It is important to have a current system in order to keep accurate reports in keeping the company operating efficiently. Another failure was the reports that were produced by the AIS. Michael Koss never took the time to look at the financial records of the company. Even though he was the CEO of the company, he never took adequate time to read and compare the financial statements on a monthly or yearly basis. SOX The article recounts some specific problems within Koss: * Koss Corporation prepared materially inaccurate financial statements, book and records, and lacked adequate internal controls from fiscal years 2005 through 2009. * Michael Koss was supposed to approve the payment of invoices greater than $5,000, but no approval was needed for wire transfers......

Words: 1071 - Pages: 5

Premium Essay

Forage

...Diamond Foods 2014 San Francisco-based Diamond Foods Inc, and two former top executives deceived investors, by lying about walnut costs to boost earnings. Diamond Foods former former Chief Financial Officer, Steven Neil, directed a scheme to under report how much money the company paid walnut growers by delaying the recording of the payments into later fiscal periods. Which allowed the company to report higher net income and beat the expectations of analysts for fiscal quarters 2010 and 2011. The CFO devised special payments to satisfy Diamond’s walnut growers and bring amounts paid to growers closer to market prices, but wrongly omitted parts of those payments from the year-end financial statements. Instead of correctly recording the costs on Diamond’s books, Neil told his finance team to record the payments as advances on crops that had not yet been delivered. Even though the payments were for prior crop deliveries, Diamond was able to manipulate walnut costs in its accounting to hit quarterly targets for earnings per share (EPS) and exceed estimates by analysts. (SEC 2014). Carters Inc 2010 Carter’s Inc., the world’s biggest maker of children’s clothing Vice President, Joseph Elles persuaded customers such as Kohl’s to make huge unauthorized purchases of Carters clothing at unauthorized discounts, which were not disclosed. The hidden discounts, caused Carter’s to overstate profits Elles falsely manipulated the dollar amount of discounts that Carter's granted to its......

Words: 678 - Pages: 3

Premium Essay

Koss Analysis

...case of Koss Corporation vs. Sachdeva and Grant Thornton, Koss Corporation, the plaintiff, alleges Sacheva, its former Vice President of Finance, committed fraud and embezzlement of company assets and Grant Thornton failed to properly conduct its audits and failed to disclose numerous accounting irregularities at Koss. Plaintiff Koss is a publicly traded company listed on the NASDAQ with its principal place of business in Milwaukee and Wisconsin. Currently, Koss mainly designs, manufactures and markets high-fidelity headphone products all over the world. Defendant SujataSachdeva was employed as former Vice President of Finance and was responsible for the day-to day operation of the company’s accounting department and accounting operations. As an officer of the company, Sachdeva was entrusted with numerous important fiduciary duties. However, she took advantage of her position to embezzle Koss’s assets of over thirty million dollars to cover her personal expense.  Defendant Grand Thornton is one of the largest accounting firms in the United States. It was hired to serve as an independent auditor for Koss during fiscal year 2004 through 2008. However, Grand Thornton was sued into court because it failed in its fiduciary role by issuing false audit opinions during this period. The negligence, carelessness and reckless auditing behavior caused that the scheme of Sachdeva wasn’t uncovered for a long time. Before March, 2004, PWC played the role of main auditor of Koss......

Words: 1920 - Pages: 8

Premium Essay

Unique Rubber Products

...INTRODUCTION Koss is a Delaware corporation with a principal place of business in Milwaukee, Wisconsin. Koss designs, manufactures and sells stereo headphones. KOSS went public in 1965. 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. The Chief Executive Officer (CEO), Michael J. Koss (MJK), 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 occurred over a 12-year period from 1997 through December 2009. QUESTIONS AND ANSWERS 1. What is the problem in the Koss Corporation case? This case evolves about a wide-ranging fraud committed by senior members of the accounting department of Koss Corporation. Over a period of years, Sachdeva, the Principal Accounting Officer, Secretary and Vice-President of Finance at Koss had stole over $30 million from the Company. Sachdeva used the embezzled funds to finance her extravagant lifestyle and for her personal spendings. Mulvaney, working in concert with Sachdeva, prepared false journal entries to disguise Sachdeva's misappropriation of funds. Sachdeva and Mulvaney attempted to hide the embezzlement in the Company's financial statements by overstating assets, expenses, and cost of sales, and by understating liabilities and sales. Over the last 12 years, Koss never realised the embezzlement made by the culprit. The embezzlement was......

Words: 4964 - Pages: 20

Premium Essay

Koss Case

...ISSUES IN ACCOUNTING EDUCATION Vol. 26, No. 3 2011 pp. 547–568 American Accounting Association DOI: 10.2308/iace-50004 Koss Corporation Case: Trouble in Brew City Brian Daugherty and Daniel G. Neely ABSTRACT: This instructional case provides auditing students an opportunity to examine an interesting real-life embezzlement and financial statement fraud occurring at a publicly traded company in the post-Sarbanes-Oxley (SOX) era. The case focuses on independent auditors’ and senior management’s reporting responsibilities related to internal control over financial reporting involving smaller public companies (nonaccelerated filers). While all public companies are subject to external auditor and management attestation on the effectiveness of internal control over financial reporting following SOX, the Securities and Exchange Commission (SEC) granted nonaccelerated filers numerous extensions for the effective date of required auditor attestation. In 2010, President Obama signed legislation to permanently exempt nonaccelerated filers from auditor attestation. The case also highlights inherent risk assessments by the independent auditor when one individual holds multiple C-level titles (Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, etc.) within the organization concurrent with membership on the board of directors, and requires students to recommend internal control policies and procedures designed to prevent or detect the......

Words: 9786 - Pages: 40

Premium Essay

Koss Case

...ISSN 1940-204X Koss Corporation Corporate Governance, Internal Controls, and Ethics: What Went Wrong? Melanie O. Anderson Slippery Rock University INTRODUCTION THE ACCOUNTING FUNCTION Koss Corporation is a Milwaukee company whose principal business is the design, manufacture, and sale of stereo headphones and related accessories. Michael Koss is the CEO; his father, John Koss, founded the company in 1958. The company has trademarks and patents for its products to differentiate itself from the competition. Koss Corp. has a six-man Board of Directors, including Michael and his father. John is 81 years old and serves as chairman of the Board. Michael is 57 years old and serves as vice chairman, president, CEO, COO, and CFO.1 The other Board members have served 25 years. Neither Michael nor the other Board members have financial backgrounds. Michael graduated college with an anthropology degree. Although Koss Corp. is a multimillion dollar company, it only employs 73 people, which auditors consider a “small business.” Michael has worked for Koss Corp. since 1976, and earns a base salary of $295,000; his total compensation, including options, is over $800,000.2 Selected financial data is presented in Table 1.3 The accounting work was handled by Sujata “Sue” Sachdeva, vice president of finance, secretary, and principal accounting officer—in a small business, employees typically have more than one responsibility. Sue, whose family was from......

Words: 2304 - Pages: 10

Premium Essay

Financial Research Report

...came upon the embezzlement of Koss Corp. Koss Corp was a company in Milwaukee, Wisconsin that manufactured stero headphones, speaker phones, computer headsets, wireless headsets, and much more. The case of Koss came about because of inaccurate financial ststements, books and records, and the lack of adequate internal controls from the years of 2005-2009. Two of Koss former employees, Sujata Sachdeva and Julie Mulvaney were the ones to engage in a wide-range of accounting fraud to cover up Sachdeva's embezzlement scam. From the lack and inadequate internal controls and failures in overseeing the accounting and financial reports by the CEO and CFO they were able to embezzle a huge amount of money. Throughout my research I will write a paper in which I must assess the failures of the firms accounting information system to prevent the related fraud/ embezzlement; Also, evaluate the effectiveness of Koss stakeholders in the event that a third-party accounting system suffers a breach. Along with assessing the level of responsibility of the software provider to the business and their clients. This paper will determine what advances in accounting and/or information technology could have done to prevent such acts from occuring, the paper will give changes that should be made to both the Sarbanes-Oxley Act of 2002 and other current laws in order to make them more effective in deterring companies from committing crimes. Lastly, Recommend a strategy that Koss Corp may use to prevent......

Words: 2242 - Pages: 9

Premium Essay

Cose Corporation Case

...Embezzlement at Koss over 12 Years! Introduction John C. Koss is recognized for creating the stereo headphone industry in 1958 with his first stereo headphone. Koss Corp. (KOSS) was incorporated in 1971 in Milwaukee, Wisconsin and manufactures stereo headphones, speaker phones, computer headsets, telecom headsets, noise reducing headsets, and wireless headsets. It is in the audio/video segment of the home entertainment industry. 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. Accordingly, its market capitalization has ranged from $3.4 million to $12.8 million to its current level of $5.1 million. Thus, it was below the full implementation level of the Sarbanes-Oxley Act (SOX) where the cutoff is a market valuation of $75 million. 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. June 30, 2009 10-K Report Excerpts 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. However, in accordance with SOX, the audit firm was not required to have, nor was it...

Words: 3373 - Pages: 14

Premium Essay

Koss Company

...principal accounting officer of Koss Corporation. During a span of more than five years, she stole nearly half the company’s pretax earnings. The scheme was uncovered when American Express noticed her credit card balances were being paid through large wire transfers originating from a company bank account. Koss is the Milwaukee-based, mostly privately held small company that’s a prominent global designer and marketer of stereophonic headphones. Sachdeva’s criminal case concluded after she pleaded guilty to embezzling $34 million from her employer, an increase of $2.5 million over earlier estimates. The six felony fraud counts carried a maximum penalty of 120 years in jail, but 15 to 20 years is appropriate under federal sentencing guidelines. Because she cooperated with authorities from the very beginning of their investigation, the judge limited her sentence on November 17, 2010, to 11 years in federal prison, plus restitution to Koss of $34 million. Her physician husband filed for divorce after the sentencing hearing. Federal officials have seized most of her assets, including a 2007 Mercedes-Benz, timeshares, jewelry, shoes, furs, and other luxury items – some that were never worn because they were put into storage for lack of space. Sachdeva’s attorney claims she has a bipolar disease of compulsive shopping disorder and is an alcoholic. Countering the defendant’s plea for a lenient sentence because of mental illness, Koss CEO Michael Koss asked the judge......

Words: 351 - Pages: 2

Premium Essay

Discussi6

...Chapter 16 Discussion Questions 1. In the early 1970s the average Canadian industrial corporation had its interest covered almost six times. By 1991, the ratio had slipped below 1, but by 2000 had rebounded to 3 times, slipping again more recently. 2. The bond agreement specifies such basic items as the par value, the coupon rate, and the maturity date. 3. The bond agreement covers a limited number of items, whereas the bond indenture is a supplement that often contains over 100 pages of complicated legal wording and specifies every minute detail concerning the bond issue. The bond indenture covers such topics as pledged collateral, methods of repayment, restrictions on the corporation, and procedures for initiating claims against the corporation. 4. The greater the security provisions afforded to a given class of bondholders, the lower the coupon rate. 5. The priority of claims can be determined from Figure 16-2: • senior secured debt, • junior secured debt, • senior debenture, • subordinated debenture, • preferred stock, • common stock. 6. Bond conversion. 7. The purpose of serial and sinking fund payments is to provide an orderly procedure for the retirement of a debt obligation. To the extent bonds are paid off over their life, there is less risk to the security holder. 8. A call provision may be exercised when interest rates on new securities are......

Words: 6868 - Pages: 28