Litigation

More on fraud at Koss Corp.

By Tracy Coenen

Today’s Milwaukee Journal Sentinel provides additional insights into the alleged fraud committed by Koss Corp. VP of Finance Sue Sachdeva. Initially the fraud was estimated at $4.5 million, but that was quickly revised upward to more than $20 million.  It is alleged that Sachdeva spent millions in corporate funds on clothing, jewelry, and other items.

My comments in the article:

The situation has left investors and others wondering how a company as small as Koss, with sales of $38?million in the most recent fiscal year, could have lost so much money without anyone’s noticing. The embezzlement came to light, according to the federal complaint, after American Express alerted Koss that money was being transferred from a company bank account to pay Sachdeva’s multimillion- dollar charges for clothing and jewelry.

Executives at Koss, or members of the board of directors, should have noticed the diversions, Tracy L. Coenen, a certified public accountant who specializes in forensic accounting and fraud investigation, said Monday. If Sachdeva spent millions on herself, as alleged, the financial statements should have looked unusual, Coenen said.

“It’s likely that her spending was dumped into cost of goods sold, a line item which can vary with market conditions,” Coenen said. “Nonetheless, the other executives at Koss should know enough about their own business and the market conditions to question whether cost of goods sold looks higher than it should.”

And on the issue of why the annual financial statement audits didn’t find the fraud:

Koss Corp. does have its books audited annually by an outside firm, Grant Thornton. But traditional financial-statement audits are unlikely to detect embezzlement, Coenen said. She said audits aren’t designed to uncover fraud and that the auditors wouldn’t know enough about the business to seriously question the variances in expenses caused by a scheme such as the one that Sachdeva allegedly engineered.

Because of its size, Koss hasn’t been required to have its outside auditor assess the effectiveness of the company’s internal controls over its financial reporting. Grant Thornton’s annual statements specify that Koss did not contract with the accounting firm to conduct such reviews.

Full post as published by The FRAUDfiles Blog on December 29, 2009 (boomark / email).