I need help with questions 3 and 4 in this case.

Koss Corporation Part A

1. 3. There are differences in the ability of an ICFR audit to detect fraud, the ability of a financial statement audit to detect fraud, the ability of a fraud/forensic accountant to detect fraud, and the ability of senior management to detect fraud. With those differences in mind, provide at least four suggestions for improving the ability of financial statement auditors to prevent or detect fraud. This may include the composition of the auditors brainstorming team, managements evaluation of ICFR, etc.
2. 4. Make a list of at least four factors leading to the Koss embezzlement and fraud not being detected by senior management and/or the independent auditor. For your list, rank order the factors (with 1 being the most contributing factor). Defend your top

factor, including why you believe it was the most contributing factor, and why you believe it outweighs the others.

Koss\tCorporation\t-\tPart\tA Fraud\tis\tmore\tdifficult\tto\tuncover\tand\toften\tgoes\tundetected\tfor\ta\tlonger\tperiod\tof time\twhen\tthere\tis\tcollusion\tamong\tthe\tperpetrators.\tKoss\tCorporation,\ta\tmanufacturer\tof headphones\tlocated\tin\tMilwaukee,\tand\ttheir\tauditors\tfound\tthis\tout\tthe\thard\tway\twhen the\tcompany\twas\tnotified\tby\tAmerican\tExpress\tthat\ttheir\tvice\tpresident\tof\tfinance, secretary,\tand\tprincipal\taccounting\tofficer\thad\tbeen\twiring\tfunds\tfrom\tKoss\tCorporation's account\tinto\ther\tpersonal\tAmerican\tExpress\taccount\tto\tfund\ther\tlavish\tlifestyle. Koss Corporation's\tprincipal\taccounting\tofficer,\tSujata\t(\"Sue\")\tSachdeva,\tembezzled approximately\t$31\tmillion\tover\t5\tyears. Koss'\tVice\tPresident-Finance\tand Secretary,\tSujata\tSachdeva,\tearned\ttotal compensation\tof\tapproximately\t$200,000\tper\tyear\tfor\tfiscal\tyears\t2008\tand\t2009\t(SEC 2009a).\tMs.\tSachdeva,\ther\thusbandan\tattorney,\tPh.D.,\tand\tM.D.\tat\tChildren's\tHospital of\tWisconsinand\ttheir\tchildren\treportedly\tenjoyed\ta\tlavish\tlifestyle\tincluding\tnumerous trips\tabroad,\tprivate\tschools\tfor\tthe\tchildren,\tand a house worth nearly\t$800,000 in the Milwaukee\tsuburbs. While\tin her 20s, Ms.\tSachdeva worked in New York for the brokerage firm of Smith Barney and the now-defunct\tinternational\taccounting\tfirm\tof Arthur\tAndersen.\tMs.\tSachdeva\twas\tportrayed\tas\tan\tactive\tfundraiser\tin\tthe\tnonprofit communityreportedly raising\tapproximately\t$1.5\tmillion\tannually\tfor\tcharitable\tcauses. She\twas\talso\tportrayed\tas\tan\timpeccable\tdresser\twith\tan\timpressive\twardrobe\t(Hajewski and\tRomell\t2010a). Internal\tControl\tAssertions\tUnder Sarbanes-Oxley The\tKoss\tCorporation\tcase\trelates\tto\tthe\tfinancial\tstatement\taudit\topinions rendered\tby\tKoss'\tindependent\taudit\tfirm,\tGrant\tThornton\tLLP,\tand senior management's\tattestation\tas to the\teffectiveness\tof internal control over financial reporting (ICFR) following the passage of the\tSarbanes-Oxley\tAct of 2002 (SOX). Section 404 of SOX requires\tthe CEO and CFO of U.S.\tregistrants,\tand\ttheir\texternal auditor,\tto\tseparately\treport\ton\tand\tattest\tto\tthe\teffectiveness\tof\tICFR.\tHowever,\tthe\tSEC repeatedly\textended\tthe\tdeadline\tfor\tauditor\tattestation\ton\tthe\teffectiveness\tof\tICFR for nonaccelerated\tfilers\t(public companies\twith a market capitalization\tof less than $75 million,\tsuch\tas\tKoss).\tKoss\trelied\ton\tthe\tSEC's\textensions\trelated\tto\tthe\trequired\tauditor attestation\tand\tnever\tengaged\tGrant\tThornton\tto\topine\ton\tthe\teffectiveness\tof\tKoss' ICFR. In\tan\tinterview,\tMichael\tJ.\tKoss\tsaid\tthe\tnew\tcosts\tassociated\twith\tSOX\twere galling\tto\this\tfamily,\twho\t''pride\tthemselves\ton\tbeing\tgood\tstewards\tof\ttheir\tcompany. We've\talways\tcomplied\twith\tgovernment\tregulations,\tso\tit's\tannoying\thaving\tto\tdeal\twith this\textra\tlayer\tof\tbureaucracy.\tSmall\tcompanies\tlike\tours\tare\tspending\thours\tin\tauditing committees\tthat\twould\tbe\tbetter\tspent\ton\tstrategic\tplanning'' (Stone\t2007). In\tOctober\t2009,\tthe\tSEC\tannounced\tone\tfinal\textension\tfor\tnonaccelerated filers\tfor\tfiscal\tyears\tending\ton\tor\tafter\tJune\t15,\t2010Koss'\tfiscal\tyear\tending\tJune\t30, 2010\t(SEC\t2009e).\tThe\tSEC\testimates\tmore\tthan\t6,000\tpublic\tcompanies\twould\tmeet\tthe exemption\trequirements\t(SEC\t2005).\tHowever,\tone\tmonth\tlater,\tthe\tHouse\tFinancial Services\tCommittee\tapproved\ta\tpermanent\texemption for nonaccelerated filers' auditor attestation on the effectiveness of ICFRthe\tGarrett-Adler\tamendment\tto the\tInvestor\tProtection\tAct\t(IPA)\t(Garrett\tand\tAdler\t2009). The\tlogic\tset\tforth\tbehind\tthe\tGarrett-Adler\tamendment\tis\tthe\tview\tthat\tthe\tcost of\tcompliance\tfor\tauditor\tattestation\ton\tinternal\tcontrol\teffectiveness\toutweighs\tthe benefits\tfor\tsmaller\tregistrants. Others have suggested that the SEC study the impact of Section 404 compliance on the next\tsmallest\tgroup\tof\tregistrants\t($75\tmillion-$250 million\tin\tmarket\tcap).\tHowever,\tthere\tis\tcontinuing\topposition\tto\ta\tpermanent exemption\tby\tmany,\tincluding\tthe\tCenter\tfor\tAudit\tQuality\t(CAQ), the\tSEC,\tcertain members\tof\tCongress,\tand\tthe\tauditing\tindustry. In March 2010, Senator Dodd unveiled the U.S. Senate's 1,336-page version of the IPA,\t''Restoring\tAmerican\tFinancial\tStability\tAct\tof\t2010,''\twith\tthe\tSection\t404(b) exemption\tnotably\tabsent\t(Dodd\t2010).\tIn\tJune\t2010,\tthe\tcongressional\tcommittee reconciling\tthe\tHouse\tand\tSenate\tversions of the proposed legislation agreed to permanently\texempt Section 404(b) compliance\trequirements\tfor nonaccelerated\tfilers (U.S. House of Representatives\t2010). In July 2010,\tPresident\tObama\tsigned\tinto\tlaw\tthe ''Dodd-Frank Wall\tStreet\tReform\tand\tConsumer\tProtection\tAct''\t(Wall Street Reform Act or WSRA), permanently exempting nonaccelerated\tfilers from\tSection\t404(b)\tauditor attestation\ton\tICFR. Even\tthough\tnonaccelerated\tfilers\tare\tnot\trequired\tto\thave\tan\taudit\tof\tICFR, management\tis\tstill\trequired\tto perform\tits assessment\tof ICFR\teffectiveness\tand include\tits report\tin the SEC\tfilings.\tThe\tmanagement\tassessment\tand\treport requirement\tof\tICFR\tcame\tinto\tplay\tprior\tto\tthe\trequirement\tfor\tan\taudit,\tand\tthus WSRA\tpermanently\texempts\tthe\tauditor's\tICFR\tattestation\tfor\tthese\tnonaccelerated\tfiler public\tcompanies. It is important\tto note that ICFR evaluations\tare designed to detect weaknesses in internal\tcontrol\tover\tfinancial\treporting,\tincluding\tanti-fraud\tcontrols,\tbut\tare\tnot designed\tor\tintended\tto\tbe\ta guarantee of fraud detection. The Public Company Accounting Oversight Board's (PCAOB)\tAuditing\tStandard\tNo. 5 (AS5)An\tAudit\tof Internal\tControl\tover\tFinancial\tReporting that\tis\tIntegrated with an Audit\tof Financial Statements (PCAOB 2007\t)provides guidance to the\tindependent\tauditor\tin\tconducting an\taudit\tof the\teffectiveness\tof ICFR.\tAS5 notes\tin an\tICFR\taudit\tthat\tthe auditor\tmay become\taware\tof fraud\tor possible\tillegal\tacts,\tand indicates\tauditors\tmust\tthen determine\ttheir\tresponsibilities\tunder\tthe\tauthoritative\tguidance\tgoverning\tsuch\tmatters. However,\tthe\tAssociation\tof\tCertified\tFraud\tExaminers\t(ACFE)\treleased\tan updated\tGlobal\tFraud\tStudy\tin\t2010.\tThe\tACFE\thas\tlong\tbelieved\tsmaller\tcompanies\t(similar to\tKoss\tCorporation)\tare\tparticularly\tsusceptible\tto\tfraud\tgiven\ttheir\trelatively\tlimited resources.\tFor\tsmall\tbusinesses,\tcomparing\tthose\twith\tfewer\tthan\t100\temployees\tand those\twith\t100\tor\tmore\t(Koss\thad\t72\temployees\tat\tJune\t30,\t2009;\tsee\tSEC\t2009b),\tthe\t15 most\tfrequent\tanti-fraud\tcontrols\tcited\tfor\tthe\tsmallest\torganizations\tincluded\texternal audit\tof financial\tstatements\t(#1),\tmanagement's\tcertification\tof\tfinancials\t(#\t3),\tand\tan external\taudit\tof\tICFR\t(#\t6\t)\t(ACFE\t2010).\tThese\tfindings\tlend credence\tto the notion\tthat external\tfinancial\tstatement\tand ICFR audits,\tcoupled\twith\tmanagement\tcertifications, are\tviewed\tto\tbe\tdeterrents\tto\tfraud. The following are excerpts from management's\tattestation\ton ICFR (signed by Michael J.\tKoss,\tCEO\tand\tCFO),\tand\tGrant\tThornton's\tfinancial\tstatement\taudit\topinion, respectively,\tfor\tthe\tcompany's\tfiscal\tyear\tended\tJune\t30,\t2009: Koss\tAttestation\t(in\tpart): Management's\tAnnual\tReport\ton\tInternal\tControls\tover\tFinancial\tReporting:\tThe Company's\tmanagement,\tincluding\tits\tChief\tExecutive\tOfficer/Chief\tFinancial Officer,\tis\tresponsible\tfor\testablishing and maintaining\tadequate internal control of financial\treporting (as defined\tin\tExchange\tAct\tRules\t13a-15(f\t)\tand\t15d-15(f\t)) and\tdesigning\tsuch\tinternal\tcontrol\tto\tprovide\treasonable\tassurances\tregarding the reliability\tof financial\treporting and the preparation\tof\tfinancial\tstatements\tfor external\tpurposes\tin accordance\twith generally\taccepted\taccounting\tprinciples. Management\tconducted\tits\tevaluation\tof\tthe\teffectiveness\tof\tits\tinternal\tcontrol over\tfinancial\treporting\tbased\ton\tthe\tframework\tin\t''Internal Control-Integrated Framework'' issued\tby\tthe\tCommittee\tof\tSponsoring\tOrganizations\tof\tthe\tTreadway Commission\t(''COSO'') as\tof\tJune\t2009. Based\ton this assessment,\tthe\tCompany's management,\tincluding\tits\tChief\tExecutive\tOfficer/Chief Financial\tOfficer,\tbelieves that\tas of\tJune 30,\t2009, the\tCompany's internal\tcontrol\tover\tfinancial\treporting\twas\teffective based on the criteria set forth by COSO in\t''Internal\tControl-Integrated Framework.'' However,\tbecause\tof\tthe\tinherent\tlimitations\tin\tall\tcontrol\tsystems,\tno evaluation\tof\tcontrols\tcan\tprovide\tabsolute\tassurance\tthat\tall\tcontrol\tissues\tand instances\tof\tfraud,\tif\tany,\twithin\tthe\tCompany\thave\tbeen\tdetected. This\tannual report does\tnot\tinclude\tan\tattestation\treport of\tthe\tCompany's registered public\taccounting\tfirm\tregarding internal control over\tfinancial reporting. Management's report was\tnot\tsubject to\tattestation by\tthe\tCompany's registered public\taccounting firm\tpursuant to\ttemporary rules\tof the\tSecurities and\tExchange Commission that permit\tthe\tCompany to\tprovide\tonly\tmanagement's report\tin\tthis\tForm\t10-K.\t(emphasis added) Grant\tThornton's\tFinancial\tStatement\tAudit\tOpinion\tScope\tParagraph (in\tpart): The\tCompany\tis\tnot\trequired\tto\thave,\tnor\twere\twe\tengaged\tto\tperform\tan\taudit\tof\tits internal\tcontrol\tover\tfinancial\treporting.\tOur audit included consideration of internal control over\tfinancial\treporting\tas a basis for designing\taudit procedures that are appropriate\tin the\tcircumstances,\tbut not for\tthe purpose\tof expressing an opinion on the effectiveness\tof the\tCompany's\tinternal\tcontrol\tover\tfinancial reporting.\tAccordingly,\twe\texpress\tno\tsuch\topinion\t(emphasis\tadded)\t(SEC\t2009b). There\tare\ta\tnumber\tof\tcharacteristics\tunique\tto\tKoss\tCorporation\tin\taddition\tto\tthe Company's\tindependent\tauditor\tnot\tbeing\trequired\tto\tperform\tan\taudit\tof\tKoss'\tICFR\tas specified\tby\tSection\t404 of SOX. Though public, approximately\t73 percent of the Company's shares are held by\tmembers\tof\tthe\tfounding\tfamily,\tincluding\tJohn\tC.\tKoss, Michael\tJ.\tKoss,\tand\tJohn\tKoss,\tJr.\tNote\tthat\tas\tjoint\tCEO\tand\tCFO,\tMichael\tJ.\tKoss\twas the\tonly\tmember\tof\tsenior\tmanagement\trequired\tto opine\ton the\teffectiveness\tof\tthe Company's\tICFR.\tThe\tonly other\trequired\tsignatory\ton the\tForm\t10-K\t(beyond\tdirectors) was\tthe\tCompany's\tVice\tPresident\tof\tFinance,\tPrincipal\tAccounting\tOfficer,\tand SecretarySujata\tSachdeva.\tMs. Sachdeva\twas not required\tto separately\tissue an opinion\ton\tKoss'\tinternal\tcontrols\tas\tshe\twas\tnot\tthe\tCompany's\tCFO,\tbut\trather designated\tas\tthe\tPrincipal\tAccounting\tOfficer. Embezzlement\tAnd\tFinancial\tStatement\tFraud At Koss On\tDecember\t21,\t2009,\tKoss\tCorporation\tfiled\ta\tForm\t8-K\twith\tthe\tSEC\treporting ''other\tevents''\tinvolving\tKoss\tCorporation.\tThe\t8-K\tfiling\tindicated\tKoss\trequested\tthe NASDAQ\tstock\texchange\tto\thalt\ttrading\tof\tits\tcommon\tstock\tdue\tto\tthe\tdiscovery\tof information\tregarding\tcertain\tunauthorized\ttransactions.\tThe company also indicated it had placed Ms. Sachdeva on unpaid\tadministrative\tleave\t(SEC\t2009c). Holiday\tcelebrations\twere\tlikely\ttempered\tfor\tcertain\tpersonnel\tof\tGrant\tThornton LLP,\tKoss'\tindependent\tauditor.\tOn\tDecember\t31,\t2009,\tKoss,\tupon\ta\trecommendation from\tthe\tCompany's\tAudit\tCommittee,\tdismissed\tGrant\tThornton.\tIn\tan\t8-K\tfiling\tdated January\t4,\t2010,\tthe\tcompany\treported\tit\thad\tdismissed\tGrant\tThornton\tand\texpanded its\tcautionary\tdisclosure\tof\tnonreliance\ton\tpreviously\tissued\tfinancial\tstatements,\taudit reports,\tand\tinterim\treviews,\tstating,\tin\tpart: The\tCompany's\tAudit\tCommittee,\ton the\trecommendation\tof\tits\tadvisors\tand management,\texpanded\tthe\tscope\tof\tthe\tCompany's\tpreviously\tdisclosed\tinternal investigation\tof\tunauthorized\tfinancial\ttransactions\tby\tSujata\tSachdeva,\tthe Company's\tformer\tVice\tPresident\tof\tFinance\tand\tSecretary,\tto\tinclude\tfiscal\tyears 2005\tthrough\tthe\tpresent.\tThe\tCompany\thas\tnow\tconcluded\tthat\tits\tpreviously issued\tfinancial\tstatements\ton\tForms\t10-K\tfor\tthe\tfiscal\tyears\tended\tJune\t30,\t2005 through\t2009\tand\ton\tForm\t10-Q\tfor\tthe\tthree\tmonths\tended\tSeptember\t30,\t2009 should\tno\tlonger\tbe\trelied\tupon\tdue\tto\tthe\tunauthorized\tfinancial\ttransactions.\tAn internal\tinvestigation\tunder\tthe\tsupervision\tof\tan\tindependent\tcommittee\tof\tthe Board\tof\tDirectors\twith\tthe\tassistance\tof\tindependent\tcounsel\tand\tforensic accountants\tis\tcontinuing.\tPreliminary\testimates\tindicate\tthat\tthe\tamount\tof unauthorized\ttransactions\tsince\tfiscal\tyear\t2005\tthrough\tthe\tpresent\thas\texceeded $31\tmillion,\tbut\tat\tthis\tpoint\tthe\tCompany\tand\tits\tadvisors\tcannot\tassess\tthe potential\timpact\ton\tits\tfinancial\tstatements\tor\tidentify\tthe\textent\tthat\tspecific\tfiscal periods\tmay\tbe\taffected.\tNor\tcan\tthe\tCompany\tand\tits\tadvisors\tyet\tassess the extent of the possible offsets through insurance, asset recoveries and other mechanisms\trelated\tto\tthe\tunauthorized\ttransactions.\tAs\tpromptly\tas\tpossible,\tthe Company\tplans\tto\trestate\tits\tfinancial\tstatements\tfor\tapplicable\tperiods\tas\tfurther investigation\tindicates.\t(Item\t4.02(a)\tof\tKoss\tCorporation's\t8-K\tfiled\tJanuary\t4, 2010)\t(SEC\t2010a). On\tJanuary\t6,\t2010,\tKoss\tfiled\tan\tamended\t8-K\twith\tthe\tSEC\tto\tinclude\tGrant Thornton's\trequired response to the Company's characterization\tof the auditor dismissal. Grant Thornton\tresponded,\tin\tpart,\tas\tfollows: We\thave\tread\tItem\t4.01\tof\tForm\t8-K\tof\tKoss\tCorporation\tdated\tJanuary\t4,\t2010, and\tagree\twith the statements\tconcerning our Firm contained therein. We have no basis to agree or\tdisagree\twith\tthe\tstatements\tand\tconclusions\tin\tItem\t4.02(a), some\tof\twhich\twere\tnot\tdisclosed\tto\tGrant\tThornton\tLLP\tprior\tto\treceipt\tof\tthis filing\t(SEC\t2010b). On\tJanuary\t18,\t2010,\ta\tKoss\tpress\trelease\tannounced\tthe\thiring\tof\ta\tnew\tExecutive Vice\tPresident,\tCFO,\tand\tPrincipal\tAccounting\tOfficer\t(Michael\tJ.\tKoss\thad\tpreviously resigned\tas\tthe\tcompany's\tCFO\tfollowing\tnews\tof\tthe\talleged\tembezzlement).\tThe newly hired officer has a degree in accounting, an M.B.A., and is a licensed CPA with extensive\tmanufacturing\texperience\t(SEC\t2010c). Safeguards Against Fraud and\tEmbezzlement Theoretically,\tthere\tare\ta\tnumber\tof\tlines\tof\tdefense\tagainst\tfraud\tand embezzlement\tsuch\tas\tthose\talleged\tagainst\tMs.\tSachdeva.\tThese\tinclude\tthe requirement\tfor\tthe\tCEO\tand\tCFO\t(both\tMichael\tJ.\tKoss\tin\tthis\tcircumstance)\tto separately\tattest\tas\tto\tthe\teffectiveness\tof\ta\tCompany's\tICFR,\toversight\tof\tthose\tcharged with\tcorporate\tgovernance\t(including\tthe\tboard\tof\tdirectors\twith\tan\tindependent\taudit committee),\tinside\twhistleblowers,\tanonymous\ttipsters,\tand\tthe\tindependent\tauditor's opinion\tas\tto\tthe\teffectiveness\tof\tICFR.\tRecall,\tGrant\tThornton\twas\tnot\tengaged\tto\tissue such\tan\topinion.\tKoss\tCorporation's\tboard\tof\tdirectors\tin\t2009\twas\tcomprised\tof\tsix individuals,\tincluding\tJohn\tand\tMichael\tJ.\tKoss.\tExcluding\tone\tnew\tmember\tin\t2006,\tthe remaining\tfive\tboard\tmembers\thad\tan\taverage\ttenure\tof\t32\tyears\t(AccountingWEB 2010). Ironically,\tnone\tof\tthese\tpotential\tsafety\tnets\tdetected\tthe\talleged\tfraud,\tbut rather\tan\tindependent,\toutside\t(not\tthe\tauditor)\tthird\tparty.\tAccording\tto\tthe\tcriminal complaint,\t''neither\tKoss'\tauditors\tnor\tits\texecutives\tuncovered\tthe\talleged\tfraud.\tRather, American\tExpress\talerted\tthe\tcompany's\tCEO,\tMichael\tKoss,\tto\tseveral\tlarge\twire\ttransfers made\tfrom\ta\tKoss\tbank\taccount\tto\tpay\tSachdeva's\tpersonal\tcredit\tcard.\tThe\tpurchases\tin question\tincluded\t$382,400\tat\ttwo\tjewelry\tstores\tand\t$1.4\tmillion\tat\tone\tclothing boutique'' (Johnson\t2010). In\tFebruary\t2010,\tKoss\tsued\tAmerican\tExpress,\talleging\tthat\tthe\tcredit\tcard company\tviolated\tthe\trequirements\tof\tthe\tBank\tSecrecy\tAct\trequiring\tcompanies\tsuch\tas American\tExpress\tto\thave\tprograms\tto\tdetect\tand\treport\tactivity\tthat\tmay\tsuggest\tthe existence\tof\tfinancial\tcrimes.\tThe\tsuit\talleges that American\tExpress\twas aware\tas early as February\tof 2008 that Ms. Sachdeva\twas\tpaying\ther\tpersonal\tcredit\tcard\tbill\twith Koss\tfunds,\tbut\tdid\tnothing\tto\tstop\tthe\tfraud\tuntil\tDecember\tof\t2009\t(Hajewski\t2010a). In\tthe\tcriminal\tcomplaint,\tSachdeva\ttold\tFBI\tagents\tshe\thad\tauthorized\tan\tassistant\tto make\tthe\twire\ttransfers,\twhich\tshe\tlater\tconcealed\tby\tfalsifying\tthe\tbalance\tin\tKoss'\tbank account.\tThe\tcomplaint\tdoes\tnot\texplain\thow\tshe\tallegedly\tmade\tthese\tchanges\tor\twhy they\twere\tnot\tdetected\tsooner.\tHer\tattorney\tdeclined\tcomment\ton\tthe\tcase\t(Johnson 2010).\tA\tfederal\tsearch\twarrant\treveals FBI agents seized 461 boxes of shoes, 34 fur coats, and 65 racks of clothing stored in\trented space and at area merchants (Hajewski\tand Romell 2010b). The U.S. Marshals Service\twas reported\tto inventory some 22,000 items\tseized\tby the FBI (Hajewski\tand Romell\t2010c).\tThe items are scheduled\tto be auctioned online with net proceeds remitted\tto Koss (Hajewski 2010b). Ms. Sachdeva's\tattorney\tattempted\tto block\tthe release\tof her medical\trecords to the court.\tAs\ta\tcondition\tof\tSachdeva's\trelease\ton\tbail,\tthe\tcourt\thad\tordered\ta mental\thealth\tevaluation\tbe\tdone\tby\tPre-Trial\tServices.\tAccording\tto\tthe\tcriminal indictment,\tSachdeva\tspent\tthe\tmoney\ton\tluxury\tclothing,\tjewelry,\ttrips,\trenovations\tto her\thome,\tand services\tfor\therself\tand her\tfamily.\tIn a letter to the court, her attorney said sensitive information in Sachdeva's medical records\twould\tbe\t''directly relevant'' to\ther\tdefense,\tadding,\t''We do\tnot\tbelieve\tit\tis\teither\tnecessary\tor appropriate\tthat\tPre-Trial\tServices\tbe\tin\tpossession\tof\tthese\trecords.'' It\twas\tpreviously reported\tthat\ther\tattorney\tplanned\tto\traise\tthe\tissue\tof\tmental\tstate\tin\tMs.\tSachdeva's defense\t(Hajewski\t2010c). Ms.\tSachdeva\tpled\tnot\tguilty\tto\taccusations\tthat\tshe\tembezzled\t$31\tmillion\tfrom Koss.\tThe\tcase\tis\tbelieved\tto\tbe\tone\tof\tthe\tlargest\tembezzlements\tin Wisconsin\thistory, and the largest\tin the U.S. for 2009 (Van de Kamp\tNohl\t2010).\tMs.\tSachdeva's\tattorney said,\t''As this\tcase\tproceeds,\twe\tintend\tto\tshow\tthat\tMs.\tSachdeva's\tmental\tand emotional\thealth\tplayed\ta\tsignificant\trole\tin\ther\tconduct.''\tAsked\twhether\tthat was the basis for her not-guilty plea, he declined additional comment. Later, her attorney issued a\tstatement reiterating his remarks and\tadded, ''This\tis the beginning of\tan ongoing\tprocess,\tand\tour\tfocus\twill\tbe\ton\tthe\targuments\twe\tmake\tin\tcourt.\tHowever, the\tissues\tof\tMs.\tSachdeva's\tmental\tand\temotional\thealth\tare\tessential\tto\tthis\tcase.'' Sachdeva\talso\twas\tordered\tby\tthe court to refrain from using alcohol and to submit to periodic drug and alcohol testing\t(Hajewski\tand Romell\t2010c). In\tApril\t2010,\tthe\tKoss\tcase\twas\tassigned\ta\tpreliminary\thearing\tdate\tof\tJune\t15, 2010.\tOn\tJune\t15,\t2010,\tfederal\tprosecutors\tindicated\tthey\twere\tworking\ttoward\ta\tplea agreement\twith\tMs.\tSachdeva\tand\tdid\tnot\tanticipate\tthe\tcase\twould\tgo\tto\ttrial (Hajewski\t2010b).\tOn\tJune\t24,\t2010,\tKoss\tCorporation\tfiled\tsuit\tagainst\tboth\tMs. Sachdeva\tand\tKoss'\tformer\tindependent\tauditor,\tGrant\tThornton,\talleging\tfraud, negligence,\tand\tbreach\tof\tfiduciary\tduty.\tThe\tsuit\tseeks\tmore\tthan\t$30\tmillion\tin damages\t(Hajewski\t2010d). Epilogue On June 30, 2010, Koss restated\tits previously\taudited\tfinancial\tstatements\tfor fiscal\tyears\t2009 and 2008. The impacts of the unauthorized transactions\twere treated as a theft loss in a\tseparate\toperating\texpense\tline\titem\ttotaling\t$8.5\tmillion\tand\t$5.1 million\tfor\tthe\tfiscal\tyears\tended\tJune\t30,\t2009\tand\t2008,\trespectively,\tand\ta\treduction\tin opening\tretained\tearnings\tof\t$3.3\tmillion\t(SEC\t2010d).\tFor\tfiscal\t2009\t(2008),\tnet\tsales were\toriginally\tunderstated\tby\t$3.5\t($2.1)\tmillion,\tand\tcost\tof\tgoods\tsold\toverstated\tby $1.7\t($1.0)\tmillion.\tSubstantial\tbalance\tsheet\tadjustments\tat\tJune\t30,\t2009,\tincluded\ta reduction\tin\taccounts\treceivable\tof\t$4.0\tmillion,\ta\treduction\tin\tinventories\tof\t$1.1 million,\tcapitalization\tof\t$1.7\tmillion\tin\tproduct\tsoftware\tdevelopment\tcosts,\trecognition of\t$2.9\tmillion\tin\tcash\tsurrender\tvalue\tof\tlife\tinsurance,\tan\tincrease\tin\taccounts\tpayable\tand accrued\tliabilities\tof\t$2.2\tmillion,\tand\tan\tincrease\tin\tlong-term\tliabilities\tof\t$1.2\tmillion\t(SEC 2010d). On\tJuly\t27,\t2010,\tMs.\tSachdeva\tpled\tguilty\tto\tall\tsix\tcounts\tof\tfelony\tfraud\tagainst her.\tUnder\tthe\tplea\tagreement,\tMs.\tSachdeva\tagreed\tto\tpay\tapproximately\t$34\tmillion\tin restitution\tto\tKoss.\tThe\tplea\tdeal\tspecifies\ta\tminimum\tof\tfive\tyears\tin\tprison\tthough federal\tprosecutors\tmay\trecommend\ta\tlonger\tsentence.\tSentencing\twas\tscheduled\tfor November\t17,\t2010\t(Hajewski\t2010e). Directions\tfor\tPART\tA: 1. Is\tthis\tfraud\tan\texample\tof\tasset\tmisappropriation\tor\tfraudulent\tfinancial\treporting? 2. Ms.\tSachdeva\tcame\tfrom\ta\twealthy\tfamily,\tso\tthe\ttheft\twas\tnot\tnecessary\tfor\ther\tto live\tcomfortably.\tWhat\tincentive\tand\tattitude/rationalization\tdo\tyou\tbelieve\tdrove\tMs. Sachdeva\tto\tembezzle?\tWould\tthere\thave\tbeen\tbehavioral\tred\tflags\tthat\tshould\thave alerted\tauditors\tto\tthe\tfraud? 3. There\tare\tdifferences\tin\tthe\tability\tof\tan\tICFR\taudit\tto\tdetect\tfraud,\tthe\tability\tof\ta financial\tstatement\taudit\tto\tdetect\tfraud,\tthe\tability\tof\ta\tfraud/forensic\taccountant\tto detect\tfraud,\tand\tthe\tability\tof\tsenior\tmanagement\tto\tdetect\tfraud.\tWith\tthose differences\tin\tmind,\tprovide\tat\tleast\tfour\tsuggestions\tfor\timproving\tthe\tability\tof financial\tstatement\tauditors\tto\tprevent\tor\tdetect\tfraud.\tThis\tmay\tinclude\tthe composition\tof\tthe\tauditor's\tbrainstorming\tteam,\tmanagement's\tevaluation\tof\tICFR, etc. 4. Make\ta\tlist\tof\tat\tleast\tfour\tfactors\tleading\tto\tthe\tKoss\tembezzlement\tand\tfraud\tnot being\tdetected\tby\tsenior\tmanagement\tand/or\tthe\tindependent\tauditor.\tFor\tyour\tlist, rank\torder\tthe\tfactors\t(with\t''1''\tbeing\tthe\tmost\tcontributing\tfactor).\tDefend\tyour\ttop factor,\tincluding\twhy\tyou\tbelieve\tit\twas\tthe\tmost\tcontributing\tfactor,\tand\twhy\tyou believe\tit\toutweighs\tthe\tothers. REFERENCES AccountingWEB. 2010. Small company suffers massive embezzlements (June 9). Available at: http://www. accountingweb.com/topic/watchdog/small-company-suffers-massive-embezzlements Association of Certified Fraud Examiners (ACFE). 2010. Report to the Nations on Occupation Fraud and Abuse: 2010 Global Fraud Study. Available at: http://www.acfe.com/rttn/rttn-2010.pdf Dodd, C. 2010. Restoring American Financial Stability Act of 2010. Available at: http://banking.senate. gov/public/_files/ChairmansMark31510AYO10306_xmlFinancialReformLegislationBill.pdf Garrett, S., and J. Adler. 2009. Amendment to H.R. 3817 offered by Mr. Garrett and Mr. Adler [amendment to IPA Discussion Draft of October 1, 2009]. Available at: http://www.house.gov/apps/list/speech/ financialsvcs_dem/ipa_garrett_adler.pdf Hajewski, D. 2010a. Koss sues American Express over Sachdeva purchases. Milwaukee Journal-Sentinel article available at: http://www.jsonline.com/business/84968597.html Hajewski, D. 2010b. Prosecutors expect plea deal with former Koss VP Sachdeva. Milwaukee JournalSentinel article available at: http://www.jsonline.com/business/96412214.html Hajewski, D. 2010c. Sachdeva moves to block release of medical records. Milwaukee Journal-Sentinel article available at: http://www.jsonline.com/business/82827707.html Hajewski, D. 2010d. Koss sues former executive, auditor over alleged embezzlement. Milwaukee JournalSentinel article available at: http://www.jsonline.com/business/97068009.html Hajewski, D. 2010e. Sachdeva pleads guilty, says she regrets fraud. Milwaukee Journal-Sentinel article available at: http://www.jsonline.com/business/99335874.html Hajewski, D., and R. Romell. 2010a. Koss suspect prominent in social, charitable circles. Milwaukee Journal-Sentinel article available at: http://www.jsonline.com/business/81902887.html Hajewski, D., and R. Romell. 2010b. Mental plea in Koss case likely. Milwaukee Journal-Sentinel article available at: http://www.jsonline.com/business/82194642.html Hajewski, D., and R. Romell. 2010c. Former Koss executive pleads not guilty to embezzlement. Milwaukee Journal-Sentinel article available at: http://www.jsonline.com/business/83040142.html Johnson, S. 2010. Fraud case feeds Sarbox-exemption critics. Available at: http://www.cfo.com/article.cfm/ 14466239?f=search Public Company Accounting Oversight Board (PCAOB). 2007. An Audit of Internal Control over Financial Reporting that is Integrated with an Audit of Financial Statements. Auditing Standard No. 5. Available at: http://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_5.aspx Securities and Exchange Commission (SEC ). 2005. SEC Extension of Compliance Dates for Nonaccelerated Filers. Available at: http://www.sec.gov/rules/final/33-8618.pdf Securities and Exchange Commission (SEC ). 2009a. Koss Corporation's Definite Proxy Statement filed with the SEC. Available at: http://www.sec.gov/Archives/edgar/data/56701/000110465909053417/ a09-25563_1def14a.htm Securities and Exchange Commission (SEC ). 2009b. Koss Corporation's Form 10-K for the fiscal year ended June 30, 2009, filed with the SEC. Available at: http://www.sec.gov/Archives/edgar/data/ 56701/000110465909051789/a09-23687_110k.htm Securities and Exchange Commission (SEC ). 2009c. Koss Corporation Form 8-K filed December 21, 2009, with the SEC. Available at: http://www.sec.gov/Archives/edgar/data/56701/000110465909070779/ a09-36816_18k.htm Securities and Exchange Commission (SEC ). 2009d. Koss Corporation Form 8-K filed December 24, 2009, with the SEC. Available at: http://www.sec.gov/Archives/edgar/data/56701/000110465909070779/ a09-36816_18k.htm Securities and Exchange Commission (SEC ). 2009e. SEC Final Extension of Section 404 Compliance for Nonaccelerated Filers. Available at: http://www.sec.gov/rules/final/2008/33-8934fr.pdf Securities and Exchange Commission (SEC ). 2010a. Koss Corporation Form 8-K filed January 4, 2010, with the SEC. Available at: http://www.sec.gov/Archives/edgar/data/56701/000110465910000176/ a10-1080_18k.htm Securities and Exchange Commission (SEC ). 2010b. Koss Corporation Form 8-K filed January 6, 2010, with the SEC. Available at: http://www.sec.gov/Archives/edgar/data/56701/000110465910000583/ a10-1262_18ka.htm Securities and Exchange Commission (SEC ). 2010c. Koss Corporation Form 8-K filed January 28, 2010, with the SEC. Available at: http://www.sec.gov/Archives/edgar/data/56701/000110465910002292/ a10-2133_18k.htm Securities and Exchange Commission (SEC). 2010d. Koss Corporation amended Form 10-K/A filed June 30, 2010, with the SEC. Available at: http://www.sec.gov/Archives/edgar/data/56701/ 000110465910036497/a10-13223_110ka.htm Stone, D. 2007. Publicly owned and family-run. Family Business Magazine (Autumn). U.S. House of Representatives. 2010. Dodd-Frank Wall Street Reform and Consumer Protection Act. Public Law 111-203, July 21. Available at: http://www.gpo.gov/fdsys/pkg/PLAW-111publ203/ pdf/PLAW-111publ203.pdf. Van de Kamp Nohl, M. 2010. The diva: Sue Sachdeva embezzled $50 Million from the Koss Company to finance a 12-year shopping spree. Milwaukee Magazine (November). Available at: http://www. milwaukeemagazine.com/currentIssue/full_feature_story.asp?newMessageID=25958