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Koss Corporation: How $ 3 4 Million Disappeared. Koss Corporation is a publicly traded company that designs and sells stereo headphones. The Koss family controls
Koss Corporation: How $ Million Disappeared. Koss Corporation is a publicly traded company that designs and sells stereo headphones. The Koss family controls a majority of the companys stock. On November Sujata Sue Sachdeva, the former Vice President of Finance, was sentenced to years in prison for embezzling $ million from the company. Her attorney claimed that she was a shopaholic. From to Sachdeva was the Principal Accounting Officer, Secretary, and Vice President of Finance at Koss. As a result of the embezzlement, Koss Corporation was required to restate its financial statements for and the first quarter of
Sachdeva used the embezzled funds to sustain a lavish lifestyle, including purchasing a vacation ownership interest in Hawaii, a Mercedes Benz, and other automobiles. She also used the proceeds to pay for luxury travel and numerous personal items, including luxury clothing, furs, designer shoes, jewelry, and art. One neighbor stated that packages delivered to her front porch would sometimes reach six feet high! Sachdeva also maintained a large household staff. Such purchases were well beyond her Koss salary approximately $ She explained her lifestyle by stating that her husband earned a couple of million dollars a year and that they both came from wealthy families.
The massive misappropriation was ultimately discovered when American Express notified the company that funds were being wired from a company bank account to pay for expenses on Sachdevas personal credit card. According to the SEC, Sachdeva authorized at least wire transfers of funds from Koss bank accounts to pay for her American Express credit card bills and issued more than cashiers checks from company accounts to pay for personal expenses. Sachdeva used the cashiers checks to make direct payments to retailers, such as Neiman Marcus and Saks Fifth Avenue. Sachdeva attempted to conceal the identities of the recipients of the checks by using acronyms on the checks such as SFA Incorporated for Saks Fifth Avenue, NM Incorporated for Neiman Marcus, and others. Sachdeva was able to conceal the fraud by directing other Koss employees to make numerous fraudulent entries in Kosss books and records. Julie Mulvaney, the companys senior accountant who was responsible for making journal entries, reconciling accounts receivable, reconciling the companys bank statements, ordering cashiers checks, processing wire transfers, and checking the daily bank account balances assisted Sachdeva in covering up the fraud. Other information about the company:
Michael Koss simultaneously held five senior management positions: Vice Chairman, Chief Executive, Chief Operating Officer, President, and Chief Financial Officer. Koss had little or no educational background or experience in the areas of accounting or finance and allegedly delegated important responsibilities typically performed by the CFO to Sachdeva on a regular basis.
Koss did not have an internal audit function.
Koss Corporations control environment appears to have been remarkably relaxed and its corporate board rarely changed. Excluding a member added in and founder John Koss, board members had an average tenure of years.
Unlike the proxy statements of typical public companies, Koss made no mention of any accounting expertise among audit committee members.
Because it was a small company, Koss was not subject to a section of the SarbanesOxley Act that requires outside auditors to evaluate a companys internal controls over financial reporting.
During the embezzlement, Kosss audit fees were reduced by half from $ in to $ in
In Sachdeva cochaired a fundraising gala for Big Brothers Big Sisters with one of Kosss outside auditors
Assume that you are a member of the audit team. Identify the fraud risk factors for misappropriation of assets that were present at Koss Corporation.
Is it appropriate for one individual to hold five significant senior management positions all at the same time in a publicly traded company? Why or why not?
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