In the Why It Matters feature “Examples of Theft and FinancialReporting Frauds” at the beginning of the chapter, we introduced youto the Koss Corporation fraud. In this problem, we provide you withfurther details about that fraud. During the fall of 2009, Koss Corporation,a Wisconsin-based manufacturer of stereo headphone equipment,revealed that its vice president of finance (Sujata “Sue” Sachdeva) haddefrauded the company of approximately $31 million over a periodof at least five years. Grant Thornton LLP was the company’s auditor,and the firm issued unqualified audit opinions for the entire period in which they worked for Koss. According to reports, Sachdeva’s theftaccelerated over a period of years as follows:FY 2005 $2,195,477FY 2006 $2,227,669FY 2007 $3,160,310FY 2008 $5,040,968FY 2009 $8,485,937Q1 FY 2010 $5,326,305Q2 FY 2010 $4,917,005To give you a sense of the magnitude of the fraud, annual revenuesfor Koss Corporation are in the range of $40 to $45 million annually.Previouslyreported pre-tax income for fiscal years 2007 through Q1 2010was as follows:FY 2007 $8,344,715FY 2008 $7,410,569FY 2009 $2,887,730Q1 FY 2010 $928,491How could Sachdeva have stolen so much money and fooled somany people over a long period? It is thought that Sachdeva hid the theftin the company’s cost-of-goods-sold accounts, and that weak internalcontrols and poor corporate governance and oversight enabled her toconceal the theft from corporate officials. Certainly, there must havebeen questions raised about the company’s deteriorating financial condition.But any number of excuses could have been used by Sachdeva toexplain the missing money. For example, she might have blamed highercost of goods sold on a change in suppliers or rising raw materials prices.Another contributing factor in Sachdeva’s ability to conceal her theftswas that top management of Koss had a high degree of trust in her, sothey did not monitor the accounts that she controlled at the company.Sachdeva’s total compensation for fiscal year 2009 was $173,734.But according to published reports, Sachdeva was known for herunusually lavish lifestyle and shopping sprees. It is reported that shespent $225,000 at a single Houston, Texas, jewelry store. Anotherreport describes a $1.4 million shopping spree at Valentina Boutiquein Mequon, Wisconsin. People familiar with her spending habitsassumed that she used family money and that her husband’s job as aprominent pediatrician funded her extravagant lifestyle. The fraud wasultimately uncovered because American Express became concernedwhen it realized that Sachdeva was paying for large balances on herpersonal account with wire transfers from a Koss Corporation account.AmericanExpress notified the FBI and relayed its concerns.Upon learning of the fraud, Koss Corporation executives firedSachdeva, along with the company’s audit firm, Grant Thornton LLP.About 22,000 items—including high-end women’s clothing, shoes,handbags, and jewelry—have been recovered to date. Sachdeva storedthe bulk of the items she purchased in rented storage units in order toconceal the items from her husband.Sue Sachdeva was released from prison after serving 6 years of an11-year sentence. For details, see http://www.jsonline.com/story/money/business/2017/04/06/sachdeva-out-prison-after-serving-six-yearsstealing-34-million-koss-corp/100129710/a. Why might Koss management have placed so much trust in Sachdeva,along with providing only minimal supervision and monitoring?b. What was Grant Thornton’s obligation to uncover the fraud?c. Why should Sachdeva’s lavish lifestyle have raised suspicions?Why might it have been ignored or explained away by her professionalcolleagues? d. How could the other members of management, the audit committee,and the auditors have been more professionally skeptical inthis situation?e. What was the audit committee’s responsibility in noticing thatsomething looked amiss in the financial statements?f. Sachdeva paid for her purchases using corporate credit cards.What internal controls could the company have used to preventinappropriate use of the credit cards?g. Some reports have described Sachdeva as having a very dominatingpersonality, and revelations were made about the fact that shewould often be verbally abusive of her subordinates in front oftop-level managers at Koss. How should top-level managers haveresponded to this behavior? What actions could the subordinateshave taken to respond to this behavior? Why might this behaviorbe a red flag indicating a heightened risk of fraud?
In the Why It Matters feature “Examples of Theft and Financial
Reporting Frauds” at the beginning of the chapter, we introduced you
to the Koss Corporation fraud. In this problem, we provide you with
further details about that fraud. During the fall of 2009, Koss Corporation,
a Wisconsin-based manufacturer of stereo headphone equipment,
revealed that its vice president of finance (Sujata “Sue” Sachdeva) had
defrauded the company of approximately $31 million over a period
of at least five years. Grant Thornton LLP was the company’s auditor,
and the firm issued unqualified audit opinions for the entire period in which they worked for Koss. According to reports, Sachdeva’s theft
accelerated over a period of years as follows:
FY 2005 $2,195,477
FY 2006 $2,227,669
FY 2007 $3,160,310
FY 2008 $5,040,968
FY 2009 $8,485,937
Q1 FY 2010 $5,326,305
Q2 FY 2010 $4,917,005
To give you a sense of the magnitude of the fraud, annual revenues
for Koss Corporation are in the range of $40 to $45 million annually.
Previously
reported pre-tax income for fiscal years 2007 through Q1 2010
was as follows:
FY 2007 $8,344,715
FY 2008 $7,410,569
FY 2009 $2,887,730
Q1 FY 2010 $928,491
How could Sachdeva have stolen so much money and fooled so
many people over a long period? It is thought that Sachdeva hid the theft
in the company’s cost-of-goods-sold accounts, and that weak internal
controls and poor corporate governance and oversight enabled her to
conceal the theft from corporate officials. Certainly, there must have
been questions raised about the company’s deteriorating financial condition.
But any number of excuses could have been used by Sachdeva to
explain the missing money. For example, she might have blamed higher
cost of goods sold on a change in suppliers or rising raw materials prices.
Another contributing factor in Sachdeva’s ability to conceal her thefts
was that top management of Koss had a high degree of trust in her, so
they did not monitor the accounts that she controlled at the company.
Sachdeva’s total compensation for fiscal year 2009 was $173,734.
But according to published reports, Sachdeva was known for her
unusually lavish lifestyle and shopping sprees. It is reported that she
spent $225,000 at a single Houston, Texas, jewelry store. Another
report describes a $1.4 million shopping spree at Valentina Boutique
in Mequon, Wisconsin. People familiar with her spending habits
assumed that she used family money and that her husband’s job as a
prominent pediatrician funded her extravagant lifestyle. The fraud was
ultimately uncovered because American Express became concerned
when it realized that Sachdeva was paying for large balances on her
personal account with wire transfers from a Koss Corporation account.
American
Express notified the FBI and relayed its concerns.
Upon learning of the fraud, Koss Corporation executives fired
Sachdeva, along with the company’s audit firm, Grant Thornton LLP.
About 22,000 items—including high-end women’s clothing, shoes,
handbags, and jewelry—have been recovered to date. Sachdeva stored
the bulk of the items she purchased in rented storage units in order to
conceal the items from her husband.
Sue Sachdeva was released from prison after serving 6 years of an
11-year sentence. For details, see http://www.jsonline.com/story/money/
business/2017/04/06/sachdeva-out-prison-after-serving-six-yearsstealing-
34-million-koss-corp/100129710/
a. Why might Koss management have placed so much trust in Sachdeva,
along with providing only minimal supervision and monitoring?
b. What was Grant Thornton’s obligation to uncover the fraud?
c. Why should Sachdeva’s lavish lifestyle have raised suspicions?
Why might it have been ignored or explained away by her professional
colleagues?
d. How could the other members of management, the audit committee,
and the auditors have been more professionally skeptical in
this situation?
e. What was the audit committee’s responsibility in noticing that
something looked amiss in the financial statements?
f. Sachdeva paid for her purchases using corporate credit cards.
What internal controls could the company have used to prevent
inappropriate use of the credit cards?
g. Some reports have described Sachdeva as having a very dominating
personality, and revelations were made about the fact that she
would often be verbally abusive of her subordinates in front of
top-level managers at Koss. How should top-level managers have
responded to this behavior? What actions could the subordinates
have taken to respond to this behavior? Why might this behavior
be a red flag indicating a heightened risk of fraud?
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