During the Fall of 2009, Koss Corporation, a Wisconsin-based manufacturer of stereo headphone equipment, revealed that its Vice President of Finance (Sujata "Sue" Sachdeva) had defrauded the company of approximately $31 million over a period of at least five years. Grant Thornton LLP was the company's auditor, and the firm issued unqualified audit opinions for the entire period in which they worked for Koss. According to reports, Sachdeva's theft accelerated over a period of years as follows:

FY 2005:............................$2,195,477

FY 2006: :...........................$2,227,669

FY 2007: :...........................$3,160,310

FY 2008: :...........................$5,040,968

FY 2009: :...........................$8,485,937

Q1 FY 2010: :..................... $5,326,305

Q2 FY 2010: :..................... $4,917,005

To give you a sense of the magnitude of the fraud, annual revenues for Koss Corporation are in the range of $40-$45 million annually, and previously reported pre-tax income for fiscal years 2007 and through Q1 2010 was as follows:

FY 2007: ............................$8,344,715

FY 2008: ............................$7,410,569

FY 2009: ............................$2,887,730

FY 20010: ...........................$ 928,491

How could Sachdeva have stolen so much money and fooled so many people over a long period? It is thought that Sachdeva hid the theft in the company's cost of goods sold accounts, and that weak internal controls and poor corporate governance and oversight enabled her to conceal the theft from corporate officials. Certainly, there must have been questions raised about the Company's deteriorating financial condition. But any number of excuses could have been used by Sachdeva to explain the missing money. For example, she might have blamed higher cost of goods sold on a change in suppliers or rising raw materials prices. Further, the Company had no internal audit function, nor was it required to have its auditor evaluate its internal control system (Koss is a nonaccelerated public filers not yet subject to the requirements concerning internal control audits in SOX). Another contributing factor in Sachdeva's ability to conceal her theftswas that top-management of Koss had a high degree of trust in her, and did not monitor the accounts that she controlled at the company.

Sachdeva's total compensation for fiscal year 2009 was $173,734. But according to published reports, Sachdeva was known for her unusually lavish lifestyle and shopping sprees. It is reported that she spent $225,000 at a single Houston, Texas, jewelry store. Another report describes a $1.4 million shopping spree at Valentina Boutique in Mequon, Wisconsin. People familiar with her spending habits assumed that she used family money and that her husband's job as a prominent pediatrician funded her extravagant lifestyle. The fraud was ultimately uncovered because American Express became concerned when it realized that Sachdeva was paying for large balances on her personal account with wire transfers from a Koss Corporation account. American Express then notified the FBI and relayed its concerns.

Upon learning of the fraud, Koss Corporation executives fired Sachdeva, along with the company's audit firm, Grant Thornton LLP. Koss Corporation is attempting to recover its monetary losses through the recovery and sale of merchandise that was purchased by Sachdeva as part of the unauthorized transactions, and through insurance proceeds and possible claims against third parties (including Grant Thornton LLP). Law enforcement authorities notified

Koss Corporation that at least 22,000 items-including high-end women's clothing, shoes, handbags, and jewelry-have been recovered to date. Sachdeva stored the bulk of the items she purchased in rented storage units in order to conceal the items from her husband.

After considering this situation, answer the following questions:

1. Why might Koss management have placed so much trust in Sachdeva, along with minimal supervision and monitoring?

2. What was Grant Thornton's obligation to uncover the fraud?

3. Why should Sachdeva's lavish lifestyle have raised suspicions? Why might it have been ignored or explained away by her professional colleagues?

4. How could management, the audit committee, and the auditors have been more professionally skeptical in this situation?

5. What was the audit committee's responsibility to notice that something looked amiss in the financial statements?

6. Sachdeva paid for her purchases using corporate credit cards. What internal controls could the company have used to prevent inappropriate use of the credit cards?

7. Some reports have described Sachdeva as having a very dominating personality, and revelations were made about the fact that she would often be verbally abusive of her subordinates in front of top-level managers at Koss. How should top-level managers have responded to this behavior? What actions could the subordinates have taken to respond to this behavior?