Expert in Koss Case Blames Michael Koss and Management for Fraud

It has been almost four years since the massive fraud committed by Sujata Sachdeva against her employer, Koss Corp., was uncovered. A year after the discovery, Koss sued Park Bank for failing to find the fraud.  The company says that Park Bank should have known that a fraud was occurring when Koss employees with proper authority withdrew funds from the Koss bank account and had Park Bank make out cashier’s checks with the funds. Koss says that Park Bank should have realized that the endorsements on the cashiers checks did not match the payees. (For example, a cashier’s check made out to N.M. was endorsed by Nieman Marcus.)

If you know anything about fraud, you know how absurd these claims are. It is the company’s responsibility to prevent and detect fraud. This is not the first time that the company made silly claims against parties it was suing in order avoid taking responsibility for Michael Koss’s own mismanagement of the company. Mind you, the company was sanctioned for its own part in the fraud, including lack of oversight, inadequate accounting controls, failure to reconcile accounts, and failure of Michael Koss to review figures before certifying the financial statements.

I speculated early on about the methods used to commit and cover up the fraud. I was generally correct. People far and wide opined that the main problem at Koss was management themselves. Michael Koss is primarily to blame. And an expert retained by Park Bank has not been kind to Michael Koss.

Richard Breeden, the former chairman of the Securities & Exchange Commission, said:

“[The embezzlement] resulted from a prolonged period in which those exercising stewardship of the company appear to have done little if anything to create an environment in which competent people were charged with diligent and prudent oversight of the shareholder’s money and the company’s future.”

Breeden said that Michale Koss showed a “public disdain for the importance of internal controls,” which I assume referred to this interview:

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. “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.”

Breeden’s report also says:

“A competent CEO, let alone a CEO and CFO, would have understood the importance of periodically evaluating whether the company’s internal controls actually worked,” the report said. “Yet whatever M. Koss did to fill his days, he admits in his deposition that he NEVER read one of the company’s bank statements, and he apparently never reviewed a list of all cash transfers out of the company either.”

And:

“Instead of acting to improve unhealthy or inadequate governance practices, Koss Corp.’s major actions in response to the embezzlement have been to sue American Express, which found the fraud, the outside auditors and several banks for processing checks or wires in accordance with the company’s instructions,” the report said. “Sadly, other than finally hiring a real CFO in place of M. Koss, the company’s strategy appears to be simply to blame others.”

It has been my opinion from the start that Koss Corp. has been busy blaming everyone but themselves. Sadly, the blame rests squarely with Michael Koss and the board for not properly supervising Sachdeva and not having proper controls in place to prevent and detect fraud.

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