Update on Koss Fraud

VIDEO: World of forensic accounting unveils how companies are cheated out of millions

The story of the alleged $31 million fraud at Koss Corp by the company’s former VP of Finance, Sue Sachdeva, hasn’t gotten much air time over the last month or so.  Aside from the usual class action lawsuits when there is a fraud discovered at a public company, the only bits of news that are remotely notable at Koss are the continued declaration of dividends and the filing of a 10-Q without any financial statements included.

Koss is a public company, but the stock is thinly traded. The Koss family apparently owns about 70% of outstanding shares of stock. The declaration of a dividend, therefore, is nothing more than the Koss family publicly announcing that they are going to pay themselves.

And then there’s that 10-Q. A 10-Q is, of course, supposed to include financial statements. That’s the main point of filing one. The company explains its non-filing of financial statements this way:

On February 16, 2010, the Company filed a partial 10-Q for the period ended December 31, 2009 that did not include quarterly financial statements. [snip]  The Company is working diligently to complete the restatements of the Company’s previously issued consolidated financial statements since fiscal year 2008 and the Company intends to amend the applicable periodic reports as promptly as it is able to do so.  Although the Company is planning to file the restatements by June 30, 2010, the Company cannot predict with certainty when these financial statements will actually be available or what action NASDAQ will take in response to the partial filing of this Form 10-Q.

So until further notice, no financial statements!

Koss is reporting, however, that the company is making changes to the internal controls:

Numerous actions were taken beginning in late December 2009 following the discovery of the unauthorized transactions, including changes relating to the Company’s banking procedures and certain other internal policies and procedures.  These actions, many of which occurred during the Company’s most recent fiscal quarter, enhance, and are expected to improve, the Company’s internal control over financial reporting.  Other improvements relating to enhancing the Company’s internal controls relate to increased documentation of the Company’s controls, improved account reconciliations, and additional review and approval processes.  The Company is planning to provide a more detailed description of these actions in the amended Form 10-K for the fiscal year ended June 30, 2009, as described in the Explanatory Note.

I added the bold to highlight a change in what Koss is telling the SEC. In this most recent 10-Q, the company is saying that its changes are going to improve its internal controls.

In a 10-Q filed for December 31, 2009, however, the story was different:

Although numerous actions were taken beginning in late December 2009 following the discovery of the unauthorized transactions, including changes relating to the Company’s banking procedures and certain other internal policies and procedures, as well as the other actions described in the Explanatory Note, the Company implemented no formal changes in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

So previously these “actions” by the company weren’t going to affect internal controls. Now they will? Someone needs to get the story straight.

And still, Koss is not releasing any information on how Sachdeva’s fraud was committed and concealed. Why?

How is it that Koss had enough information available in order to report the amount of theft by year, yet they haven’t told us any other details? Surely if they know with some level of certainty how much was stolen, they also know how it was done. After all, if you can identify a transaction as fraudulent, then you can also report the substance of the transaction.

All along I’ve said that Koss isn’t releasing this information because it’s going to make the family and the executives look really bad. They’re either going to look incompetent, guilty of wrongdoing, or both.

The latest word from some reliable sources is that the problem here is with the Koss family. It is being alleged that the Koss family used the company as its personal piggy bank, running personal expenses through the business (and thereby deducting those personal expenses as if they were business expenses, lowering the tax bill for the company and the family). The family allegedly looked the other way as Sachdeva helped herself too. Quid pro quo.Until Sachdeva went too far with her theft, and something had to be done.

If there is any truth to this, it is going to be very damaging to the company. However, I can tell you from experience that this is not entirely unusual. Closely held businesses are often used by their owners to commit tax fraud. And surely, if the Koss family was doing something like this, the examination of the accounting records by the forensic accountants will reveal it. And then what does the family do?

This could explain why Koss Corp. hasn’t been more forthcoming in providing information about the fraud committed by Sachdeva. Someone might be busy figuring out how to spin this. More important, someone might be busy figuring out how to keep the family out of trouble with the IRS. That could be a very, very expensive problem.

And just to be clear, I have no ties whatsoever with Koss Corp., the Koss family, or Grant Thornton. I have no access to information or data via the company or its auditors. I have no position in Koss stock. I am simply relaying the allegations I have heard, and speculating on why they could be true and what the implications are if they are true.

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2 Comments

  • Francine McKenna says:
    23 May 2010

    Don’t forget. PwC went from being auditor to primary tax advisor in 2004. PwC let the family do this if it turns out your suspicions are true. I would not be surprised at all. I’ve seen it. There’s a sense of entitlement because the family’s name is on the company and a common disdain for paying taxes and answering to anyone, including the IRS and OSHA.

    “You may say, “Who’s getting hurt here?” After all, the family, the vast majority shareholders, took some risks and we might assume understood full well the cost/benefit equation of running a loosey-goosey shop. (We haven’t even begun to talk about their IT…)

    Well…the hundreds of employees at their factories, their vendors, their customers, and business partners, the IRS, the minority shareholders (maybe even their employees in the 401k plan) and, of course, the communities they operate in are getting hurt.” http://retheauditors.com/2010/01/16/defending-koss-and-their-auditors-just-loopy-distorted-feedback/

    Great work, Tracy.

    fm

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