Koss Corporation Case Study

1、Koss Corporation Case Study Ruiqi QiuBackgroundBased in Milwaukee, Wisconsin, Koss Corporation is a listed company on NASDAQ (ticker symbol: KOSS). In 1958, John C. Koss teamed up with engineer Martin Lange to invent and produce the worlds first SP/3 stereophone. The original SP/3 stereophone allowe

2、d listeners to experience sound as they had never before, bringing them closer to the music they love. Until now, Koss is still designing and manufactring new kinds of headphones and audio accessories, and is still one of the leading company in the earphone industry.Koss is controlled by the Koss fa

3、mily. In 2005, two of the six directors are from Koss family-John C. Koss and Michael J. Koss. John Koss. John C. Besides, John Koss, Jr is the vice president (sales) of the company. The 2005 Proxy Statement of Koss Corporation shows that these three people held around 76.5% of the companys shares.

4、Koss is the founder of the the company, and was the Chairman since 1958. His older son, Michael, was the president since 1987 and COO since 1991.What HappenedOn December 18, 2009, American Express blew the whistle regarding to Sachdevas fraud. It noticed that there were huge transfers from Kosss ban

5、k to pay Sachdevas credit card bills. Koss Corporation acted fast on this fraud. “Within days, on December 21, 2009, trading in KOSS on NASDAQ was halted as the company reported the unauthorized transactions. Sachdeva was terminated on December 23, 2009. “ Also, the company amended and restated its

6、financial statements for fiscal years 2008 and 2009 and the first three quarters of fiscal year 2010.Sujata Sachdeva, the Koss scandals protagonist, has been served as the Vice President-Finance, Secretary in Koss since 1992. She owned 1.13% of the companys shares in 2005, the year she started to em

7、bezzle money from companys account. Her salary plus bonus and compensations totaled around $165, 000 in physical year ended June, 2015. However, from 2005 to 2010, she embezzled over 31.3million at the companys cost, around 189 times of her total revenue. Plus, Koss is not a large company, and she s

8、tole nearly half the companys pretax earnings during those years.Not surprisingly, Sujata Sachdeva used the embezzled funds to finance an extravagant lifestyle that included limousine trips, lavish vacations and astounding purchases of jewelry and designer clothing. According to SEC, “With the assis

9、tance of Koss senior accountant Julie Mulvaney, Sachdeva concealed the theft on Kosss balance sheet and income statement by overstating assets, expenses, and cost of sales, and by understating liabilities and sales. Based on the fraudulent records prepared by Sachdeva and Mulvaney, Koss prepared mat

10、erially false financial statements and filed materially false current, quarterly, and annual reports with the SEC.”Whats WrongIronically, Sujata Sachdeva was seen as a model employee. Michael Koss acknowledged he was too trusting of Sachdeva, whom he considered promoting to chief financial officer.T

11、he main reasons for Sujata Sachdeva is easy to explain using fraud triangle. First of all, she wanted to maintain her luxury lifestyle, which is her motivation. And then she found excuses to do the crime and believed the stealing would not be found. The last element of the fraud triangle is opportun

12、ity. She was the Vice PresidentFinance and it is easy for her to alter companys financial data. Egoism is the theory that can be applied to this case. Sujata Sachdeva was too greedy and wanted more than she was able to get. She thought of only herself and forgot the interest of the company and share

13、holders.Influence On StakeholdersThere are many individuals and companies influenced by this fraud: Sachdeva pleaded guilty to embezzlement and was sentenced to 11 years in federal prison in 2010. Her sentence was reduced to eight years and three months in 2015 after she helped prosecutors in at lea

14、st two cases involving other individuals involved in her embezzlement. Grant Thornton has to pay $8.5 million for settlement with Koss. According to SEC, “In June 2010, Koss restated its financial statements for the preceding two fiscal yearsKoeppel was the engagement partner for the Koss audit for

15、three of the four years of the embezzlement.”American Express needs to pay $3 million to Koss . Although American Express was the whistle blower, but Koss stated that American Express waited months to report this scheme knowing Sujata Sachdeva didnt have so much income.Another bank was sued as well.

16、 Park Bank was accused of not acting in good faith when Sachdeva made unauthorized transactions on company accounts. Judge David Borowski ruled in favor of Park Banks motion for summary judgement in this a five-year-long legal battle on the basis that Koss had not provide sufficient evidence to prov

17、e that the back acted in bad faith. This case is still not settled, and Koss will appeal dismissal of this lawsuit.Shareholders interest was harmed. The company recovers about $11.5 million from the settlement with Grant Thornton and American Express, but it has to eat the rest $19.8 million, and it

18、 will be transferred to all the shareholders.Michael Koss was ordered by SEC to reimburse Koss $242,419 in cash and 160,000 of options pursuant to Section 304 of the Sarbanes-Oxley Act. That is besides Michaels voluntary reimbursement of $208, 895 in bonus to Koss.What Could Have Been DoneThere are

19、many ways to prevent the fraud from happening. First of all, the internal control could have been done better.“While Kosss internal controls policy did not prevent Sachdeva and Mulvaney from processing large wire transfers and cashiers checks outside of the accounts payable system without seeking or

20、 obtaining Michael J. Kosss approval.” This issue could have be prevented by reviewing wire transfer record on a regular basis, or requiring authorization of wire transfer and cashiers check when the amount exceed a certain amount. “Kosss computerized accounting systems were almost 30 years old and

21、access to the accounting systems could not be locked at the end of the month and there was no audit trail. Sachdeva and Mulvaney were thus able to make undetected post-closing changes to the books” This problem could have been solved by improving the accounting systems. Segregation of duty should he

22、lp prevent fraud too. “Many account reconciliations were improperly performed by the same persons who initiated or recorded the transactions (i.e. Sachdeva or Mulvaney)” Sachdeva took the authorization role, so she should not take custody role at the same time.Michael Koss, the COO should have revie

23、wed carefully the reporting certifications from Sachedeva regarding to Kosss accounting.As far as the Audit Committee and Board of Directors, the Audit Committee met twice and the Board held four meetings in the fiscal year ended June, 30, 2005. The audit committee had three independent members. Amo

24、ng those three members, only one of them was determined by the Board as an “Audit Committee Financial Expert”. This shows that Koss didnt value Audit Committee and did not let the committee function as it should. Therefore, the Audit Committee should have more financial experts and should discuss wi

25、th internal (if any) and external auditors more often. Board of Directors also need to meet more often and discuss more about internal control issues. Koss could have builded up internal auditing department to actively monitor and detect the suspicious transactions.Second, if the company was not exe

26、mpted from the internal control should have been required audit of internal controls over financial reporting (ICFR), this fraud could have been prevented. Third, the banks could have contacted Koss when they found suspicious transactions instead of wait until a few months later. Moreover, they coul

27、d have signed a contract with more strict ruling of transferring companys money to individuals account, such as verifying with the internal auditors when the amount is large, or provide the monthly bank statements to internal auditors. Forth, the external auditors should have been more proactively m

28、onitor the companys internal control environment and give out their opinion more cautiously, making sure there is no material fact existing. Off course, Sachdeva herself could have been more self-controlled and could have thought of others interest before making her decision. If she could have checked her behaviors with ethical values and complyed