Audits Aren't All That

My online pal, the fantastic Michael Hasenstab, sends me the following updates on the Koss Corporation embezzlement scandal.

First, how on earth did this get by the company's financial officers, let alone the Grant Thorton LLC, the company's auditors?

The $31 million embezzlement at Koss Corp. included several spurts of rapid-fire spending, according to a recent court filing - including one three-day span in 2006 during which nearly $500,000 flew out of the Milwaukee company's accounts and into the hands of three high-end retailers and a credit card company.

The lists of checks and wire transfers shed new light on the scheme for which Sujata "Sue" Sachdeva, former vice president of finance for Koss, is facing six federal felony charges. She was arrested by the FBI in December and has pleaded not guilty.

The list, which takes up the equivalent of about 10 single-spaced pages, is contained in a lawsuit that Koss filed last month against Sachdeva and its former auditor, Grant Thornton LLP.

(Emphasis mine.)

But justice will be done:

Sujata "Sue" Sachdeva will plead guilty to all six felony fraud counts leveled against her and agree to pay an estimated $34 million restitution to Koss Corp. under a plea deal reached Friday that calls for at least five years in prison, although prosecutors may recommend a much longer sentence.

Prosecutors, Sachdeva and her attorney agree that the recommended prison sentence will be at least five to six years. The U.S. attorney's office can argue for several aggravating circumstances - such as her role as the organizer of the criminal activity - that could boost the  recommended sentence up to the 15- to 20-year range. Sachdeva and her lawyer, Michael F. Hart, can object to the aggravating circumstances.

Did I say justice? I imagine the penalty would've been a little steeper if Sachdeva had used a handgun to rob a 7-11 of a hundred bucks or so.

My point remains the same: audits aren't the financial safeguard you might think they are. Auditors can't catch everything. And, in some cases, they can't even catch what seems to be obvious.

When it comes to finances, proceed with caution. And a heavy dose of skepticism.

Theft at Koss Blamed on Relaxed Attitude, Lax Oversight

My online buddy, Michael Hasenstab, updates me with the latest on the Koss Corporation saga:

It was a family operation, where top bosses mingled with workers on the assembly floor, where the chief executive juggled five major titles at once, where the board of directors barely changed in 20-plus years.

And where the company's vice president of finance could move around millions of dollars without approval from above.

In this unquestioning environment, authorities say, then-Koss Corp. executive Sujata "Sue" Sachdeva was able to spend more than $31 million in Koss funds on a lavish lifestyle and extravagant shopping sprees.

Grant Thornton, the company's auditors, accept no blame; audits aren't perfect and if the financial controls of a company appear to be appropriate and in place, an audit won't necessarily catch fraud. Though you'd think Grant Thornton would have tripped across an embezzlement of $31 million in a company with assets of $28.5 million and gross sales of $38.2 million. Still, it's a textbook example of the shortcomings of the accounting profession. We can only do so much. The rest is up to the company.