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Investigation of Koss Corporation

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jophy tan

on 16 March 2014

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Transcript of Investigation of Koss Corporation

FACILITATOR : Assoc. Prof. Dr. Zaleha Abdul Shukor
Tan Pei Cia
Lee Xin Yuan
Kee Wei Xiang
Chong King Jun
Ng Chun Kit
Problem
Problem
Management has different expectation on the job scope of external auditors.
Sujata Sachdeva
Principal Accounting Officer, Secretary & VP of Finance
Julie Mulvaney
Senior Accountant
Conclusion
Koss Family
Who involved
the problem?
34 million embezzlement of cash
fraudulent entries to the company's books to conceal the embezzlement by overstate
current assets
, understate
liabilities
, understate
sales
, overstate
cost of sales
, and overstate
expenses
.
Problem
Fraudulent Financial Statement
vs
Restated Financial Statement

Affect decision making of the users of Financial Statement
Massive weakness in internal control
No segregation of duties
No updated accounting system
Lack of proper information processing controls

Poor financial reporting and internal controls oversight by the BOD & Audit Committee
Non-existence of ethic & compliance program
Persons
performed
the fraud

Michael J. Koss
CEO, CFO, COO, President,
Vice Chairman of BOD
Persons failed to
prevent
fraud

Audit committee
Persons failed to
detect
fraud

External auditor
MJK and family (>70% of total shares)


Persons adversely
affected
as a result of the fraud


Minority shareholders
Undetected for over 12 years (1997-2009)
Koss reported the following alleged theft figures for each fiscal year:
Had far too much autonomy in the finance function.
Well aware of what the other executives and the auditors were (or were not) looking at.
A highly trusted employee – with the company for 17 years.
Increased her alleged theft over the years.
How is it possible that the
particular person get
involved in the problem?
Auditors consider Company's internal controls in designing appropriate audit procedures, NOT for the purpose of expressing an opinion on their effectiveness.
Sujata Sachdeva
Bipolar disorder

Sujata was responsible for many ‘management representations’ provided to its external auditors, Grant Thornton

Wild shopping spree where she would buy various luxury items
Why
did the involved person(s), involved
“So it’s annoying having to deal with this extra layer of bureaucracy. Small companies like ours are spending hours in auditing committees that would be better spent on strategic planning.” -MJK

Lack of interest, aptitude, and appreciation for accounting and finance
Do not like to deal with bureaucracy
2005 - $2,195,477
2006 - $2,227,669
2007 - $3,160,310
2008 - $5,040,968
2009 - $8,485,937
2010 - $10,243,310 (two quarters)

average of more than $500,000 a month

Segregation of Duties
Safeguarding of Assets
Information Systems

Company's management team

Who
should be the responsible person to be alert about the problem?

Michael Koss & John Koss


Koss, John Jr.
Company's Stock
What should have been done
by the responsible person to
avoid the problem?
Why other executives do not have the curiosity to look further?
GRANT THORNTON LLP
The fraud was conducted by senior financial executive
Checks and balances need to be in place

Should have an independent review by a person not involved in the day-to-day transactions

A mechanism in place for employees to report wrongdoing to the board of directors or audit committee directly

Koss did not engage Grant Thornton LLP to conduct an evaluation of internal controls over financial reporting

responsibility and
accountability towards detecting fraud in his
company

Executives at Koss, or
members of the board of
directors
should have noticed the
diversions

Free to hire other professionals such as fraud investigators to do other work at the company to manage the risk of fraud

Why
is the responsible person not alert about the problem
Lack of MJK's accounting know-how
All executives and company board members should be actively involved in monitoring their company's finances

Hire qualified CFO in place

Effective internal control should be established

Failure of MJK to review figures before certifying the financial statements

MJK never inspect Company's bank statement, GL, or even unusual journal entries!
Conducted own evaluations of the company's internal controls for at least the last two fiscal years

The auditor?
CEO?
BOD?
What should the involved person have done in the first place before getting deeper into the problem
Richard Breeden, the former chairman of the Securities & Exchange Commission, said  that Michael Koss showed a “public disdain for the importance of internal controls" by referring to the interviewed by:-

In a 2007 interview with Family Business magazine, Michael Koss complained about the burdens of being a public company. Koss became public through an indirect route several decades ago, when founder John Koss purchased a small public company in New York that was bankrupt. Koss kept the NASDAQ listing and changed the trading name to Koss.

In the interview, Koss said the new costs associated with Sarbanes-Oxley were particularly galling to his family, who "
pride themselves on being good stewards of their company
."

"
We've always complied with government regulations
," Koss told Family Business.

When a man points a finger at someone else, he should remember that four of his fingers are pointing at
himself
. ~Louis Nizer

Hire external auditors to perform special audit on the effectiveness of internal controls
Investigation of Koss Corporation
Tan Pei Cia
Lee Xin Yuan
Kee Wei Xiang
Chong King Jun
Ng Chun Kit
Overstate Current Assets
Understate liabilities
Understate sales
Overstate cost of sales
Overstate expenses
Full transcript