a.

Why might Koss management have placed so much trust in Sachdeva,

along with providing only minimal supervision and monitoring?
The management have placed so much trust in Sachdeva for she
was employed in the company for a long time. Because of these trusts
given by the management to their employees, those constituted weak
internal controls and poor corporate governance and oversight which led
to so many foolish acts and crimes committed by the Vice President of
Finance.
b. What was Grant Thorntons obligation to uncover the fraud?

c. Why should Sachdevas 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 committees 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?

Koss management Case

1. Why might Koss management have placed so much trust in Sachdeva, along with minimal
supervision and monitoring?
Koss management might have placed so much trust in Sachdeva because she was is such a high
position. She worked in the company as Vice President, when you are that high on the totem pole,
you are given trust that you know what you are doing and that you want what is best for the
company. Companies dont hand out positions to people that have no clue as to what they are doing
as well as someone that they believe will ruin the company. The same thing goes along with having
minimal supervision and monitoring. She was a Vice President, someone that was supposed to be
trusted, someone who was a leader, someone who was supposed to set an example. It just goes to
show you that it is not always the person on the bottom of chain that needs to be watched. It is
easier for higher up management and owners to sneak money away than the one who have minimal
access to records and bank statements.
2. What was Grant Thorntons obligation to uncover the fraud?
Grant Thornton was Kosss internal auditor. An internal auditor is defined as An independent,
objective assurance and consulting activity designed to add value and improve an organizations
operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk management, control and governance
processes. (p. 23-24) As the auditor for this business, Grant was supposed to make sure that every
piece of financial information was in its right place as well as wrote and calculated right. Clearly
Thornton did not do his job the right way. By looking at the numbers provided, any auditor could see
that something is not right in the company. After seeing it, the auditor would address the issue and
deal with it the proper way. I have a feeling he knew all along what was going on but was too afraid
to open his mouth.
3. Why should Sachdevas lavish lifestyle have raised suspicions? Why might it have been ignored
or explained away by her professional colleagues?
Sachdevas lavish lifestyle should have raised red flags soon after it started to happen. It
should because most people that work in a company roughly know how much each person makes.
After seeing her spend the money she was someone should have investigated a little more. I mean it
is possible for a Vice President of a company to be rich, but for a life style to go to the extreme as
spending $1.4 million on a shopping spree is questionable. One of the number one ways to detect
fraud is by a change in lifestyles. Her new lifestyle could have been ignored because of her job title.

No one wants to question their boss, let alone someone higher up in management. By doing that, all
you are asking for is to get fired. In the book it says that people assumed she used family money or
her husbands, but not one person questioned her about it. (p. 116) No one wanted to be the one that
was questioning the boss. It is much easier to turn and look the other way than stand up in what you
believe.
4. How could management, the audit committee, and the auditors have been more professionally
skeptical in this situation?
The audit committee and the auditors could have checked financial more often than what they did.
When they noticed that the income was dropping quite a bit each year, they should have started
looking at documents more closely as well as more often. The audit committee is supposed to speak
with management on their findings. Well instead of talking to the President and Vice President, they
should have only talked to the President. There was really no communication in this business when
it came down to financials. It was basically whatever Sachdeva said was right. No one stepped up to
double check her work and no one questioned it. Being a bigger company, more than one person
should have defiantly doubled checked the financial statement.
5. What was the audit committees responsibility to notice that something looked amiss in the
financial statements?
The audit committees responsibility was to look over the accounting and financial reporting process
as well as the financial statement audits; appoint, compensate and oversee the external auditor; and
to ensure that the company has a whistleblower program. (p. 52) At first glance the committee could
notice that something was not right with the companys financial records. But nothing was done and
nothing was said.
6. 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?
One thing internal controls could have done was make Sachdeva turn in receipts along with a credit
card statement at the end of each month. By doing this, every dollar spent on company card can be
accounted for. You can see not only where the money is going but what the money is spent on as
well as the date and time it was spent. This is just one simple way to keep fraud down. Many
companies require this every month with their employees. For every transaction where a receipt
cannot be present is deducted from their pay check. Another thing the company could have done is
set a limit on the card. By setting a limit, you can make sure amounts are not being spent that
shouldnt be.
7. 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?

Top-level management should have put a stop to it right at the start. By allowing it to happen, shows
her that it was ok. If they would have stated something in writing and verbally, she may have either
stopped or possibly could have be let go. Also by allowing this to happen, shows other employees
that it is completely ok to act the way to other employees as well as people above her. Some actions
that defiantly should have been taken would be to sit her down and just talk to her and let her know
that it is not acceptable in the company, especially to her bosses. The next action would be like I said
to have something in writing and have her sign it. Not only does this cover the companys butt, but
you have the proof that you said something to her. By doing this, she cannot come back and say that
she wasnt aware she was verbally abusing anyone and that nothing was brought up to her.

FraudFocus:ContemporaryandHistoricalCases
2-50

a.
Management at Koss may have placed a high level of trust in Sachdeva
because they knew her for a long period of time and she did not exhibit behaviors
that caused concern. Further, management at the company was reportedly quite
relaxed in its approach to monitoring and control. These behaviors led to a lack of
professional skepticism on the part of management.

b.
Grant Thornton was obligated to uncover the fraud in the sense that they
ignored red flags (weakening financial condition, poor internal control and
monitoring) that should have alerted them to problems in the company. Grant
Thornton experienced an audit failure because they issued unqualified audit
opinions on materially misstated financial statements. It appears that they may not
have employed an appropriate level of professional skepticism.

c.
Sachdevas lavish lifestyle should have raised suspicions because her level of
conspicuous consumption far exceeded her apparent ability to pay given her
relatively modest salary. However, her lifestyle may have been explained away or
ignored because of her husbands prominent medical practice. People likely
assumed that her lifestyle was none of their business and that she simply used her
familys joint money to fund her lavish purchases. Even when confronted with a
known fraud, individuals that know a fraudster often have difficulty believing that it
is true denial is a common factor even in the face of seemingly obvious signs of
fraud.

d.
Management and the audit committee should have been skeptical of
Sachdeva because of the weak internal controls in place, coupled with deteriorating
financial conditions at the company. The auditors should have been more skeptical
of her explanations for the financial condition of the company. The auditors should
have collected more audit evidence to better understand the increase in cost of
goods sold. The auditors should have realized that there was a risk of fraud given
the lack of monitoring and the high level access to corporate bank accounts that
Sachdeva had.

e.
The audit committee plays an important oversight role in any organization.
The benefit of the audit committee should be that they are independent from the
daily operations of the organization, and should therefore be in a position to more
critically evaluate the personalities and behaviors of senior management, including
the CFO in this particular case. Further, audit committees of public companies are
required to have at least one financial expert, and it is the obligation of that
individual to consider and initiate investigation of anomalies in the financial
statements. Clearly this oversight did not occur in the case of Koss.

f.
Whenever an organization uses corporate credit cards, there should be
controls over their use. Most typically, such controls involve review and approval of
payment by a senior official. In Sachdevas case, senior management allowed her to
use the credit cards without review, and she was the individual in charge of making
payments on the cards. Thus, basic controls involving review and segregation of
duties were not used at Koss.

g.
Top-level managers should have been skeptical about the reasons for
Sachdevas behavior. In retrospect, it seems that she was purposely trying to
intimidate her subordinates through this dominating behavior. Management may
have questioned why she was trying to intimidate her subordinates. Was there
something that she was trying to cover up? This tactic was also used at Enron,
whereby top-level management would explicitly indicate that any questioning of its
actions (from employees, external analysts, etc.) was an indication of how dense
the questioner was. Top-level managers should have wondered why she felt the
need to behave in this manner, and they should have objected to it in person or at
least told her in private to eliminate the behavior if for no other reason than to
establish and maintain a more professional tone in the workplace. This kind of
behavior puts subordinates in a very awkward position. In Sachdevas case, she
reportedly acted dominating to the vast majority of her subordinates. In such a
setting where one individual is not singled out, it should be easier for the group to
act cohesively and approach senior management privately to complain about the
situation. In a setting where one individual is singled out, that individual should
consider finding a formal or informal mentor to help them decide how to garner the
support to approach senior management with their concerns.

2-51

a.
Yes, the members of the audit committee appear to be professionally
qualified. They have all held financially responsible leadership positions at large
companies in industries similar to those as Koss Corporation. The committee meets
less frequently than quarterly, which is fairly infrequent. Prior to SOX, this level of
audit committee involvement was common, but it is now more common for audit
committees of public companies to meet at least bi-monthly, if not monthly. Without
frequent meetings, committee members are not able to generate sufficient
questions and then gather sufficient evidence in order to develop a professionally
skeptical view of the true situation at the company, and that is what appears to
have happened at Koss. You might consider gathering evidence to support your
conclusions about the professional qualifications of audit committee members. For
example, you might observe the questions that they ask during meetings, and their
level of preparedness. You might inquire about their continuing professional
education and experiences. You will obtain this information in various ways, but
personal observation will likely be very important.

b.
Lawrence Mattson is the audit committee financial expert. He is a retired
president of a large consumer products company, which should make him financially
knowledgeable. However, the fact that he has clearly been retired for quite some
time (he is in his late 70s) calls into question whether he is currently up to speed
on the financial reporting demands faced by a public company. Without adequate
financial knowledge, it is nearly impossible to exercise adequate professional
skepticism knowledge is one of the bases upon which skepticism rests. Financial
expertise is important for audit committee members because they play a significant
role in corporate governance over financial matters they are a key defense in
potential problems with financial reporting.

c.
Their compensation is very low given the important role that they play in the
company, and the fact that this is a public board. Further, many audit committee
members at public companies receive stock options or stock grants to align their
interests with the long-term goals of stockholders. These audit committee members
receive no stock options, and hold very few (if any) shares.

d.
Theodore Nixon is the only audit committee member who is still an active,
working financial professional. The other members of the audit committee are
relatively older, and are no longer working in the public sector. This certainly does
not disqualify them, but coupled with the relatively few meetings that the
committee has, it calls into the question whether the audit committee is really

functioning in a strong oversight capacity. The responsibilities that the proxy

statement outlines seem reasonable, but it seems impossible that an audit
committee with these characteristics could carry out those responsibilities in so few
meetings.

Auditing Chapter 3
3-51. Koss management might have placed so much trust in Sachdeva
without oversight and monitoring for a variety of reasons: possibly the cost
of establishing, implementing and maintaining internal controls seemed
prohibitive to the company. Sachdeva could also have had one of those
faces that seem like she should be trustworthy, so they didnt feel the need
to monitor her activities.
Grant Thornton should have seen the large variances in the cost of goods
sold account and done some vouching of those particular expenses.
Perhaps they also should have confirmed with the various suppliers the
amounts they were charging Koss for the headphone component parts. In
any case, they did not have enough professional skepticism about
Sachdeva.
Sachdevas lifestyle should have raised suspicion due to the fact that she
spent more on individual shopping trips than she made for the entire year.
Auditors and the board should be familiar with the fraud triangle, and
recognized both opportunity and rationalization. Petty jealousy may have
played a part in her coworkers ignoring or explaining away all of
Sachdevas high-end purchases. It also mentions that they thought she
used family money or her husbands money to pay for her purchases, but
perhaps they didnt actually get to know her background, or research how
much money pediatricians make.
As noted above, everyone in this case could have really asked themselves
how much pediatricians make, or simply could have asked Sachdeva about
her family history in a friendly, non-threatening way and ascertained that
she did not come from a wealthy background. Also, the auditor should have
vouched invoices related to the costs of goods sold, and inquired of the
audit committee about their review of credit card statements, internal
control procedures. The audit committee should have been reviewing
monthly financial statements, bank reconciliations, and especially the wires.

The audit committee has the responsibility to review monthly financial

statements, internal control policies and procedures and to investigate any
large variances.
A review of the monthly credit card statements could have been incredibly
helpful in preventing an ongoing charging of personal expenses to
corporate accounts.
Top-level managers should have spoken to Sachdeva about appropriate
behavior, especially the tone-at-the-top, which is a hallmark of good
corporate governance. There should have been some sort of policy
regarding verbal abuse of employees, and disciplinary procedures
associated with violations. Perhaps the company should have also
established an internal whistleblower hotline for subordinates to call when
they felt that Sachdeva was speaking to the inappropriately. Employees
should have felt as though someone would have their back in the event of
management abuse of power.