1. Why was Ms. Cohen not concerned that cash was overstated?
2. Which asset accounts might be overstated? How difficult would it be to overstate them? What would be the effect on Koss’s value if assets were overstated?
3. Which liability accounts might be understated? How difficult would it be to understate them? What would be the effect on Koss’s value if liabilities were understated?
4. Which expense accounts might be overstated? How difficult would it be to overstate them? What would be the effect on Koss’s value if expenses were overstated?
5. How difficult would it be to understate revenues? What would be the effect on Koss’s value if revenues were understated?
6. Of the possible errors (asset or expense overstatements, liability or revenue understatements), which is the most likely error? Which is least likely? Why?
7. What is the likely effect of the pending lawsuits on Koss Corporation’s value? Explain.
8. Did the alleged embezzlement likely start in 2005, or earlier? Explain.
9. Was stability in Koss’s management and board a strength or weakness in terms of corporate governance? Explain.
10. Evaluate Koss’s compensation structure for its executives and its board. Did that compensation structure influence corporate governance? Explain.
In 1953, John C. Koss founded the Koss Corporation and began renting televisions to hospital patients. Several years later he teamed up with a friend, Martin Lange, to develop audio products. In 1958, they began building a model 390 stereo phonograph (record player) and a model SP-3 stereophone in Mr. Koss’s basement. The phonograph offered few advantages over existing products, but the SP-3, the world’s first stereo headphone, was an immediate success.1
In 1962, Koss introduced the Pro4 stereophone, an even higher-quality headset that became the recording industry standard. Music sensations such as Tony Bennett and the Beatles were photographed using the Pro4. In 1969, a Pro4 was installed on Air Force One. By 1983, Koss employed more than 850 people in locations throughout the world. In 1991, John C. Koss retired from active management, and his oldest son, Michael J. Koss, became president and CEO.2