Read the facts of the case in Problem 2-26 to become familiar withthe fraud involving Koss Corporation. From the company’s October 7,2009, proxy statement (Def 14A filing with the SEC), we know the followingfacts about the company’s audit committee and its members:Thomas L. Doerr 65, has been a director of the company since 1987. In1972, Mr. Doerr co-founded Leeson Electric Corporation and served asits president and CEO until 1982. The company manufactures industrialelectric motors. In 1983, Mr. Doerr incorporated Doerr Corporation asa holding company for the purpose of acquiring established companiesinvolved in distributing products to industrial and commercial markets.Currently, Mr. Doerr serves as president of Doerr Corporation.Mr. Doerr owns no stock in Koss Corporation and received $24,000 incash compensation during 2009 to serve on the audit committee.Lawrence S. Mattson 77, has been a director of the company since 1978.Mr. Mattson is the retired president of Oster company, a division ofSunbeamCorporation, which manufactures and sells portable householdappliances. Mr. Mattson is the designated audit committee financial expert.Mr. Mattson owns no stock in Koss Corporation and received $23,000 incash compensation during 2009 to serve on the audit committee.Theodore H. Nixon 57, has been a director of the company since 2006.Since 1992, Mr. Nixon has been the CEO of D.D. Williamson, whichis a manufacturer of caramel coloring used in the food and beverageindustries. Mr. Nixon joined D.D. Williamson in 1974 and was promotedto president and chief operating officer in 1982. Mr. Nixon isalso a director of the Nonprofit Center for Quality of Management.Mr. Nixon owns 2,480 shares of common stock of the company(less than 1% of outstanding shares) and received $21,000 in cashcompensation during 2009 to serve on the audit committee.John J. Stollenwerk 69, has been a director of the company since 1986.Mr. Stollenwerk is the chairman of the Allen–Edmonds Shoe Corporation,an international manufacturer and retailer of high-quality footwear.He is also a director of Allen–Edmonds Shoe Corporation; BadgerMeter, Inc.; U.S. Bancorp; and Northwestern Mutual Life InsuranceCompany. Mr. Stollenwerk owns 13,551 shares of common stock of thecompany (less than 1% of outstanding shares) and received $23,000 incash compensation during 2009 to serve on the audit committee. Audit Committee• The Audit committee met three times during the fiscal year endedJune 30, 2009. The external auditors (Grant Thornton LLP) werepresent at two of these meetings to discuss their audit scope andthe results of their audit.• Koss claims that each member of the audit committee is independentas defined in NASDAQ Marketplace Rule 4200.• The proxy statement describes the responsibilities of the audit committeeas follows: “The audit committee, among other things, monitorsthe integrity of the financial reporting process, systems of internalcontrols, and financial statements and reports of the company;appoints, compensates, retains, and oversees the company’s independentauditors, including reviewing the qualifications, performanceand independence of the independent auditors; reviews and preapprovesall audit, attests and reviews services and permitted nonauditservices; oversees the audit work performed by the company’s internalaccounting staff; and oversees the company’s compliance with legaland regulatory requirements. The audit committee meets twice a yearwith the company’s independent accountants to discuss the results oftheir examinations, their evaluations of the company’s internal controls,and the overall quality of the company’s financial reporting.”a. Does the description of the audit committee members warranta conclusion that its members appear to be professionallyqualified for their positions? Do they meet enough times duringthe year to accomplish their responsibilities? What additionalinformation might you need to answer this question,and how would the auditor obtain that information?b. Who was the audit committee financial expert? Do you thinkthat the experiences of this individual as described shouldensure that he is truly a financial expert capable of fulfillinghis roles in this regard? Why is financial expertise importantfor audit committee members in general?c. In your opinion, was the compensation that the audit committeemembers received for their services adequate?d. Based on the information that you have learned in Parts a., b.,and c. of this problem, what weaknesses in the audit committeegovernance structure existed at Koss Corporation immediatelypreceding the discovery of fraud?
Read the facts of the case in Problem 2-26 to become familiar with
the fraud involving Koss Corporation. From the company’s October 7,
2009, proxy statement (Def 14A filing with the SEC), we know the following
facts about the company’s audit committee and its members:
Thomas L. Doerr 65, has been a director of the company since 1987. In
1972, Mr. Doerr co-founded Leeson Electric Corporation and served as
its president and CEO until 1982. The company manufactures industrial
electric motors. In 1983, Mr. Doerr incorporated Doerr Corporation as
a holding company for the purpose of acquiring established companies
involved in distributing products to industrial and commercial markets.
Currently, Mr. Doerr serves as president of Doerr Corporation.
Mr. Doerr owns no stock in Koss Corporation and received $24,000 in
cash compensation during 2009 to serve on the audit committee.
Lawrence S. Mattson 77, has been a director of the company since 1978.
Mr. Mattson is the retired president of Oster company, a division of
Sunbeam
Corporation, which manufactures and sells portable household
appliances. Mr. Mattson is the designated audit committee financial expert.
Mr. Mattson owns no stock in Koss Corporation and received $23,000 in
cash compensation during 2009 to serve on the audit committee.
Theodore H. Nixon 57, has been a director of the company since 2006.
Since 1992, Mr. Nixon has been the CEO of D.D. Williamson, which
is a manufacturer of caramel coloring used in the food and beverage
industries. Mr. Nixon joined D.D. Williamson in 1974 and was promoted
to president and chief operating officer in 1982. Mr. Nixon is
also a director of the Nonprofit Center for Quality of Management.
Mr. Nixon owns 2,480 shares of common stock of the company
(less than 1% of outstanding shares) and received $21,000 in cash
compensation during 2009 to serve on the audit committee.
John J. Stollenwerk 69, has been a director of the company since 1986.
Mr. Stollenwerk is the chairman of the Allen–Edmonds Shoe Corporation,
an international manufacturer and retailer of high-quality footwear.
He is also a director of Allen–Edmonds Shoe Corporation; Badger
Meter, Inc.; U.S. Bancorp; and Northwestern Mutual Life Insurance
Company. Mr. Stollenwerk owns 13,551 shares of common stock of the
company (less than 1% of outstanding shares) and received $23,000 in
cash compensation during 2009 to serve on the audit committee.
Audit Committee
• The Audit committee met three times during the fiscal year ended
June 30, 2009. The external auditors (Grant Thornton LLP) were
present at two of these meetings to discuss their audit scope and
the results of their audit.
• Koss claims that each member of the audit committee is independent
as defined in NASDAQ Marketplace Rule 4200.
• The proxy statement describes the responsibilities of the audit committee
as follows: “The audit committee, among other things, monitors
the integrity of the financial reporting process, systems of internal
controls, and financial statements and reports of the company;
appoints, compensates, retains, and oversees the company’s independent
auditors, including reviewing the qualifications, performance
and independence of the independent auditors; reviews and preapproves
all audit, attests and reviews services and permitted nonaudit
services; oversees the audit work performed by the company’s internal
accounting staff; and oversees the company’s compliance with legal
and regulatory requirements. The audit committee meets twice a year
with the company’s independent accountants to discuss the results of
their examinations, their evaluations of the company’s internal controls,
and the overall quality of the company’s financial reporting.”
a. Does the description of the audit committee members warrant
a conclusion that its members appear to be professionally
qualified for their positions? Do they meet enough times during
the year to accomplish their responsibilities? What additional
information might you need to answer this question,
and how would the auditor obtain that information?
b. Who was the audit committee financial expert? Do you think
that the experiences of this individual as described should
ensure that he is truly a financial expert capable of fulfilling
his roles in this regard? Why is financial expertise important
for audit committee members in general?
c. In your opinion, was the compensation that the audit committee
members received for their services adequate?
d. Based on the information that you have learned in Parts a., b.,
and c. of this problem, what weaknesses in the audit committee
governance structure existed at Koss Corporation immediately
preceding the discovery of fraud?
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