The chapter vignette "Asset Misappropriation Collusion at Koss Corporation" on page 314 highlights the fraud at Koss Corporation, where the principal accounting officer, Sujata ("Sue") Sachdeva, embezzled approximately $31 million over 5 years to fund her lavish lifestyle. This was a material amount in relation to Koss Corporation's reported net income ($1,976,668 for 2009 and $4,494,289 for 2008). The fraud was not detected by the external auditors. Ms. Sachdeva used wire transfers from the company's account to her American Express account, cashier's checks, manual checks, and traveler's checks drawn on the company's account to fund her purchases.
The embezzlement was concealed by overstating assets, expenses, and cost of sales and understating liabilities and sales, through the collusion of two employees in the accounting department. At the time Ms. Sachdeva was arrested, more than 22,000 items were confiscated from her home that had been purchased using Koss Corporation funds. Below are just a few examples taken from the court complaint filed against her of purchases Ms. Sachdeva made on her American Express charge card that were later paid for by wire-transferring money from Koss Corp. to American Express as payment:
1. $127,400 from A.C. Zuckennan Jewelers;
2. $670,000 from Au Courant, a women's clothing store;
3. $12,500 from Channel BTQ #16;
4. $14,000 from Georgio-Armani;
5. $40,000 from Holzman's Furs;
6. $255,000 from Karat 22 Jewelers;
7. $1,358,322 from Valentina Boutique, a women's clothing store.
Required
a. Is this fraud an example of asset misappropriation or fraudulent financial reporting?
b. Ms. Sachdeva came from a wealthy family, so the theft was not necessary for her to live comfortably. What incentive and attitude/rationalization do you believe drove Ms. Sachdeva to embezzle? Would there have been behavioral red flags that should have alerted auditors to the fraud?
c. Koss Corporation designs, manufactures, and sells stereo headphones and related accessories. Do you think it would be normal for a manufacturing company to have recurring disbursements to American Express or more than 100 cashier's checks written per year? How could auditors have used audit software to detect these disbursements?
d. What internal controls could Koss Corporation have had in place to prevent employee collusion in the first place or detect the fraud after it began?
e. Ms. Sachdeva avoided using wire transfers during the month of June because she knew this was the month the auditors would review the bank records. What could the auditors have done differently to detect the fraud?
f. Do you believe auditors should be held liable for not detecting fraud when management attempts to hide the fraud and there is employee collusion? Does it matter whether the amounts are material or immaterial to the financial statements?