Koss Corporation: Where were the internal controls?

(Refer to Koss Corporation: How $34 Million Disappeared? for the basic facts on the Koss Corporation embezzlement for additional information)

On September 2,2010, the Security & Exchange Commission brought an action against Sujata Sachdeva, Vice-President of Finance, and Koss senior account and subordinate, Julie Mulvaney, who allegedly help her cover up the fraudulent scheme. The SEC alleged that Sachdeva and Mulvaney caused Koss to submit false and misleading financial statement. Sachdeva regularly relied on Mulvaney to reconcile the cash short falls and to balance the books.

Sachdeva and Mulvaney primarily hid the embezzlement by making fake entries on the Companys general journal. For example, the false journal entries disguised the theft by overstating assets, expense, and cost of sales, and understating liabilities and sales. Mulvaney maintain binders that detailed numerous false journal entries that were made to the Companys accounting book and records. With those entries, Mulvaney reclassified Company funds with no supporting documentation and no legitimate explanation. Mulvaney also maintained a series of folders that included documentation of over 100 fraudulent transactions that were included in the Companys accounting books and records.

Sachdeva and Mulvaney were able to hide the substantial embezzlement in part because the Company did not adequately maintain internal controls to reasonably assure the accuracy and reliability of financial reporting. Kosss internal controls policy required Michael Koss to approve invoices of $5,000 or more for payment. However, Koss allegedly delegated duties typically done by the CFO to Sachdeva on a regular basis. Koss also had little or no educational background or experience in accounting or finance. Many of the cashiers checks exceeded $5,000, and some exceeded $100,000. However, its controls did not prevent Sachdeva and Mulvaney from processing large wire funds transfers and cashiers checks outside of the accounts payable system to pay for Sachdevas personal purchase without seeking or obtaining Michael Kosss approval. In addition, many account reconciliations were not prepared, maintained, or reviewed as part of Kosss accounting records. Koss computerized system was almost 30 years old.

(source: SC Complaint, US Security and Exchange Commission v. Sujata Sachdeva, and Julie Mulvaney, August 31, 2010. SEC, Accounting and Auditing Enforcement Release No 3330 / October 24, 2011, and SEC v. Koss Corporation and Michael J. Koss, Civil Case No 2:11-cv-00991, USDC. ED., Wisc Mary Van de Kamp Nohi, The Diva, Sue Sachdeva, Embezzled $50 million from the Koss Company to Finance a 1 year Shopping Spree Milwaukee Magazine (November 2010), pp. 57-68)

Required:

a. List the major internal controls that were absent within Koss Corporations internal control system.

b. What internal controls should have been implemented or applied to ensure proper controls over the Companys recorded transactions?