INTRODUCTION

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.

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.

THE ACCOUNTING FUNCTION

The accounting work was handled by Sujata Sue Sachdeva,

vice president of finance, secretary, and principal accounting

officerin a small business, employees typically have more

than one responsibility. Sue, whose family was from India,

had been employed at the company for 17 years. She was

a trusted and valued employee and earned about $200,000

per year. She had two assistants: Julie Mulvaney, senior

accountant, and Tracy Malone, junior accountant.

Sue told friends and coworkers that her family was very

wealthy and held a very high social status in India. She

reported that she and her husband spent their wedding night

in the Taj Mahal. It was important for her and her family to

live in the best area, attend the best schools, and socialize

with the recognized society members of Milwaukee. Sue

served on several charity boards, organized lavish parties for

their events that cost millions of dollars, and purchased all

items that did not sell at the charity auctions she organized.

Sue also had a reputation as a demanding boss: Her

assistants were required to help her with the charity events,

and Sue took them out to lunch almost daily. Julie and Tracy

also went to Sues house to help her unpack and store the

many expensive items she purchased. Sue loved designer

clothing, shoes, and accessories and purchased over 20,000

items in a five-year period from 2004 to 2009. She purchased

so many items that they did not fit in her house. So, she

rented a storage unit and a two-office suite to store her

unused purchases. In addition, Sue made some purchases

that she never picked up from the retailers.

Sue could not pay for all of these purchases with her

$200,000 salary or her physician husbands $600,000 salary.

Her job at Koss Corp. provided her with an extra opportunity

to obtain the funds necessary to support her lavish lifestyle:

She committed the fraud over at least a five-year period to

fulfill her compulsive shopping disorder.

THE FRAUD

Sue started stealing from the company with relatively small

thefts that increased over the years. She partially hid the

alleged theft in cost of goods sold (COGS) and indicated

the increase in COGS was due to rising material costs. She

also overstated assets and other expenses and understated

liabilities and sales. Sue embezzled $34 million over a five-year period

beginning in 2004; only the embezzled amounts from

2005 forward were documented, even though she had been

allegedly embezzling since 1997. The fraud was uncovered

when American Express notified Michael Koss about an

unusual, ongoing practice: Sue paid her personal credit card

balances with several large wire transfers from a Koss Corp.

bank account.

The following amounts represent the funds embezzled

by Sue:

2005 - $2,195,477

2006 - $2,227,669

2007 - $3,160,310

2008 - $5,040,968

2009 - $8,498,434

2010 - $10,286,988 (two quarters)

Sue wired an average of $500,000 per month from Koss

Corp. bank accounts to pay for her personal credit card bills.

Sue colluded with her senior accountant Julie to embezzle

the money. Julie maintained she just made the journal

entries and cash transfers based on Sues orders, noting that

Sue was a powerful, imperious, overbearing, determined,

and willful superior.

FRAUDULENT ACTIVITIES

Koss Corp., like most businesses, had a system of internal

controls designed to protect the companys assets. The

fraudulent activities that occurred included large payments

by check or wire transfer, misuse of petty cash, an outdated

computerized accounting system, unprepared account

reconciliations, and minimal management review of financial

statements.

PAYMENTS BY CHECK OR WIRE TRANSFER

Michael approved invoices of $5,000 or more for payment.

Yet processing wire transfers and cashiers checks outside of

the accounts payable system did not require his approval.

This flaw in Koss Corp.s internal control system allowed Sue

and Julie to cover up the embezzlement.

Over the total 12-year embezzlement period, Sue wrote

over 500 cashiers checks, totaling over $17.5 million, from

Park Bank.

Julie did not have the authority to sign checks

at Park Bank, although she often ordered and processed

the checks for Sue without Michaels knowledge or

authorization.

So as not to draw attention to these checks,

they were often made payable to initials, such as N-M, for

Neiman Marcus or S.F.A. for Saks Fifth Avenue.

Julie helped Sue initiate and authorize wire transfers of

Koss Corp. funds to Sues personal creditors for over $16.3

million without requiring or obtaining Michaels approval.

PETTY CASH

Most organizations maintain a petty cash fund to facilitate

small, incidental expenses. Petty cash balances and

transactions are usually small. Given the insignificance of

petty cash, management and auditors spend very little time

reviewing these accounts. Sue used petty cash as another

vehicle to obtain funds: more than $145,000 over five years.

COMPUTERIZED ACCOUNTING SYSTEM

A computerized accounting system and the related

software were designed to prevent certain unintentional (or

intentional) errors. For example, entering an out of balance

entry is not possible in most computerized accounting

systems. Koss Corp.s computerized accounting system,

however, was almost 30 years old and did not have sufficient

controls. Koss Corp.s accounting system could not lock

out changes made after the end of the month, and there

was no audit trail. Sue and Julie made undetected post-

closing changes to the accounting records without Michaels

approval or knowledge.

Julie covered up Sues embezzlement by forging entries

to match the company cash account balance with the cash on

hand balance in the bank and holding back receivables to

match the amount of the cash shortfall.

In addition, Julie did not record Internet sales or sales from the companys

retail outlet in order to cover up the cash shortfall.

RECONCILIATIONS

Other checks and balances in accounting systems include

account reconciliations that are prepared by the accounting

staff. Account reconciliations were not prepared or maintained

at Koss Corp. Reconciliations that were performed were

prepared by Sue or Julie, so they were not correct; they also

initiated or recorded all accounting entries.

MANAGEMENT REVIEW

Sue provided Michael with financial statements and reports

that were prepared from the fraudulent accounting records,

and Michael did not review them in great detail. Because

he trusted Sue, Michael did not fully review the financials

before approving them.

THE AUDITORS

Grant Thornton, a national firm based in the U.S., was the

auditor for Koss Corp. at the time. Over the five-year period,

Koss Corp. paid Grant Thornton $625,000 to audit their

financial results. Grant Thornton classified Koss Corp. as a

non-accelerated filer. The fraud was never detected during

the audit for several reasons: (1) Grant Thornton reviews the

companys financials to make sure that every account balance

aligns with accounting standards. Because Sue and Julie were

balancing the books to counteract the fraud, nothing seemed

suspicious. (2) Lax oversight ran rampant at Koss Corp.

Because Michael trusted Sue, he believed all her numbers

were correct.

Sue knew the questions the auditors would ask and the

documents they would review. Because Sue knew the July 1

year-end would bring scrutiny to Junes records, she never

moved any money in June. Grant Thornton viewed Koss

Corp. as a small audit of a well-run company with low risk

and an excellent training ground for new auditors.

CONCLUSION

Sue embezzled over $34 million in a five-year span. She

betrayed the trust of her boss, Michael, as well as the

companys employees and shareholders.

QUESTION:

What were the responsibilities of the following entities or individuals for the fraudulent activities? What are the possible consequences?

a. American Express b. Park Bank c. Sue Sachdeva d. Michael Koss e. Julie Mulvaney