Question: In the Professional Judgment in Context feature at the outset

In the Professional Judgment in Context feature at the outset 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—$45 million annually. Previously reported pre–tax income for fiscal years 2007 and through Q1 2010 was as follows:
FY 2007: ............ $8,344,715
FY 2008: ............ $7,410,569
FY 2009: ............ $2,887,730
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. Koss Corporation is attempting to recover its monetary losses through the recovery and sale of merchandise that was purchased by Sachdeva as part of the unauthorized transactions, and through insurance proceeds and possible claims against third parties (including Grant Thornton LLP). Law enforcement authorities notified Koss Corporation that at least 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.
After considering this situation, answer the following questions:
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 management, the audit committee, and the auditors have been more professionally skeptical in this situation?
e. What was the audit committee's responsibility to notice 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?

View Solution:

Sale on SolutionInn
  • CreatedSeptember 22, 2014
  • Files Included
Post your question