Read the facts of the case in Problem 2-51 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. Members, ages, and descriptions of the audit committee members are as follows:
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 Chief Executive Officer 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.
LAWRENCES. 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 Chief Executive Officer 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.
● The Audit Committee met three times during the fiscal year ended June 30, 2009. The independent accountants (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, attest and review 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-c of this problem, what weaknesses in the audit committee governance structure existed at Koss Corporation immediately preceding the discovery of fraud?