UPDATE 2-Headphone maker Koss fires auditor after firing VP
* Grant Thornton fired as auditor
* Firing follows criminal complaint against ex-VP
* Shares have not traded since Dec. 21
(Adds Grant Thornton comment, bylines)
By Jonathan Stempel and Emily Chasan
NEW YORK, Jan 4 (Reuters) - The headphone maker Koss Corp (KOSS.O) said on Monday it fired Grant Thornton LLP as its auditor, will restate at least three years of results and has expanded an internal probe into alleged embezzlement by a finance executive who was also terminated.
The Milwaukee-based company said it dismissed Grant Thornton on Dec. 31 after approval by its board of directors. It said it is evaluating replacements and expects to receive a recommendation from its audit committee within one week.
Koss also said it expanded its internal probe into the activities of its former vice president of finance, Sujata "Sue" Sachdeva.
It said the amount of unauthorized transactions conducted since its 2005 fiscal year exceeds $31 million, compared with the more than $20 million it reported on Dec. 25.
The company said investors should not rely on financial statements since the end of its 2005 fiscal year and that it plans restatements for at least its last three fiscal years.
Koss had reported net sales of $38.2 million in its latest fiscal year, which ended June 30.
In a statement, Grant Thornton said Koss did not hire it "to conduct an audit or evaluation of internal controls over financial reporting. Establishing and maintaining effective internal controls is management's and the board's responsibility."
Sachdeva's lawyer, Michael Hart, a principal at Kohler & Hart LLP in Milwaukee, did not immediately return a call seeking comment.
Koss fired Sachdeva after an alleged multi-year shopping spree in which she bought millions of dollars of expensive clothes, jewelry and other personal items.
According to a criminal complaint filed last month in Wisconsin federal court, Sachdeva also used company funds to pay down her credit card bills.
Koss said last month it also placed two accounting employees who worked for Sachdeva on unpaid leave.
The alleged fraud was discovered after American Express Co (AXP.N) noticed that card bills were being paid via several large wire transfers originating from a Koss account.
Sachdeva acknowledged to the FBI that she used her position at Koss to approve wire transfers and falsified Koss' records to hide her tracks, the complaint said.
For an earlier story on the case, please click [ID:nN25146622]
Koss shares have not traded since Dec. 21, when the company asked Nasdaq to impose a trading halt. They last traded at $5.51. (Reporting by Emily Chasan and Jonathan Stempel; editing by Andre Grenon)
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The Milwaukee business community is wondering how a company with $38 million in annual sales could have lost $20 million in an embezzlement. This goes beyond being just a crime, it is an embarrassment.
The internal controls were lax, the separation of duties were lax, the audit committee was lax, the Grant Thornton auditing firm was lax, the CEO was lax and on and on. Plenty of blame to go around. The Koss Corporation and the Koss family had ultimate trust in their VP of Finance, Sue Sachdeva. She purchased expensive items using her own American Express account and then fraudulently wired Koss Corporation funds to pay the bills. The IRS will be knocking soon. If the American Express fraud department hadn’t reported it, she would probably still be doing it. As I tell my clients, you cannot trust anyone.
In a 2007 interview, Michael Koss complained that the new costs associated with Sarbanes-Oxley were particularly galling to his family. The problem is that Sarbanes-Oxley did not go far enough. Sarbanes-Oxley, for all its reputation as a hard-hitting law, fails to correct a crucial accounting system weakness: the potential for what is called the “moral seduction” of outside auditors. Executives still have too much control over the hiring and firing of auditors, which discourages accountants from providing failing critical reports. A company’s culture between auditors and management usually becomes entrenched.
To see the real-world consequences here, just look at Enron. Its auditor, Arthur Andersen, came to identify so strongly with the client that its judgment was compromised, and the demise of one led to the demise of the other.
SarbOx was supposed to change all that. Yet the law leaves in place strong incentives for auditors to please clients even as it mandates complex new rules that are supposed to make corporate books more credible. The system needs to be changed. The auditors need to make independent assessments instead of just ratifying clients’ accounting. The auditors need to be hired by boards rather than company executives and be retained for a fixed period without the chance of being rehired.
In the 2007 interview, Koss said that “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.” Sarbanes-Oxley requires that there be an audit committee that is independent of management. There had to be some indication in the Koss numbers that something was wrong. The other executives and the members of the board of directors had a duty to pay closer attention to the numbers. If the audit committee is filled with laymen or buddies of the management, business will continue as usual.
The audit committee is uniquely suited to assess risk and internal financial controls and to ensure that company strategy and finances are aligned. It is time for this committee to assess its unique role as messenger to the rest of the board of directors and to shareholders on all matters of risk management and financial-reporting judgments and to bolster trust. Brilliant and curious individuals are what audit committees desperately need, especially during these times of economic turmoil. The audit committee needs to concentrate on protecting shareholders from misleading accounting and outright fraud.
The audit committee of Koss Corporation and the outside auditing firm, Grant Thornton, failed in their responsibilities. Don’t let your company be the next Koss Corporation.
Terrence Rice is a Milwaukee CPA and is author of www.financialinstitutionembezzlement.blogspot.com and www.churchembezzlement.blogspot.com
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