Audit Malpractice Defense: Four Key Issues


When a major fraud is discovered in a company, one of the key targets of litigation is usually the independent auditors. Two well-publicized cases in which management or shareholders suing the auditors after fraud was uncovered involve Koss Corp. (auditors Grant Thornton) and Navistar International Corp. (Deloitte & Touche).

Plaintiffs look to the auditors for potential recovery since the auditors typically have deep pockets and large insurance policies. Auditors (and their attorneys) need to know how to defend themselves in these suits.  Naturally, the auditors recognize that audits are supposed to provide reasonable assurance that the financial statements are fairly stated. Continue reading

Auditor Malpractice: How to Sue an Audit Firm and Win


Last week, Reuters printed an interesting and enlightening interview with Steven Thomas, the managing partner of Thomas, Alexander & Forrester … an attorney known for suing large auditing firms for malpractice… and winning!

Recent big wins include $520 million and $130 million judgments against BDP Seidman, on behalf of Espirito Santo and Batchelor Foundation, respectively. Auditors Ernst & Young (E&Y) and KPMG have been on the losing sides of large cases, and Deloitte, E&Y, KPMG, and McGladrey & Pullen are all current defendants.

So how does Thomas (or any plaintiff’s attorney) win a case against an auditing firm when there is a sizeable fraud (such as the Koss Corp. embezzlement) or the collapse of a Ponzi scheme (such as the Bernie Madoff case)? Continue reading

Compliance Week: Koss Embezzlement and Small Company Internal Controls


Today’s Compliance Week article, “SEC Pursues Small Company Over Lax Internal Controls,” [subscription required] discusses the SEC settlement with Koss Corp over the $34 million embezzlement by former Vice President of Finance Sujata (Sue) Sachdeva.

The article explains the settlement, which is essentially a clawback of some of Michael Koss’s compensation: Continue reading

Genuine Remorse From Sachdeva? Laughable.


Yesterday, Sue Sachdeva was sentenced to 11 years in prison for her $34 million theft from her employer, Koss Corp.  I predicted a little slap on the wrist of 5 to 7 years, so she got two little slaps instead.

The Washington Post is reporting that Judge Lynn Adelman gave her less than the 15 to 20 years requested by the prosecutor because of her “acceptance of responsibility and the genuineness of her remorse.” Continue reading

Koss Fraud Coverup Deemed “Complex” By the Government


Yesterday the government’s sentencing memorandum in the criminal case against Sujata Sachdeva (the woman who stole more than $34 million from her employer, Koss Corp.) was released.  It had a number of items of interest. Prior to sentencing, the prosecution and the defense each get to make their case for a higher or lower sentence.

The defense’s arguments were absurd. They argued that Sue Sachdeva should get a lighter sentence because:

a. she’s been a law-abiding citizen until now

b. the fraud was “simple”

c. and poor, poor Sue has a “compulsive shopping disorder” Continue reading

Koss Fraud: We Didn’t Bother to Look at the Endorsements On Our Own Checks, But Grant Thornton Should Have!


The latest news in the Koss Corporation fraud committed by ex-VP of Finance Sue Sachdeva is a lawsuit filed by the company against Sachdeva and auditors Grant Thornton. It’s unlikely that the company will collect much from Sachdeva, but the auditors are a great target because they have deep pockets (especially in the form of a professional liability insurance policy).

Everyone expected Koss to sue Grant Thornton. It’s just standard procedure to sue the auditors after a fraud is discovered. It never matters to the companies that audits are not designed to detect fraud and the auditors tell management this over and over.

It never matters to the companies that they are the ones responsible for establishing and maintaining internal controls over financial reporting, as well as putting procedures in place to prevent and detect fraud. Continue reading

Koss Fraud: Unrecorded Revenue?


How does a company with about $40 million in annual revenue fall victim to a $31 million (or more) fraud by the VP of Finance? Simply, Koss Corp. gave Sue Sachdeva the keys to the castle. She apparently ran the company’s finance function with little oversight from anyone else.

Koss has done something I think is a bit unusual. In a filing with the SEC, the company detailed the alleged theft by year:

Continue reading

More Fallout From Koss Fraud, But Michael Koss Stays on Strattec Board


The latest news related to the $31 million fraud committed by Koss Corp.’s ex-VP of Finance Sue Sachdeva is activity at Strattec. Laughably, Michael Koss was the chairman of Strattec’s audit committee since 2003. In January, he was removed as head of that committee, but still remains on the board and on the audit committee. It’s interesting that Strattec didn’t announce the developments related to Michael Koss anywhere, and we’re only finding about it now because Journal Sentinel reporter Cary Spivak started asking questions.

So Koss was removed as audit committee chairman but remains on the board and on the audit committee. I think it’s time for the Strattec board members to ask themselves a serious question: If Michael Koss didn’t care enough about his own company to pay attention to the financial statements, what makes you think he’ll pay attention at Strattec?

I’ve been more than happy to publicly state that Michael Koss and the rest of the executives were asleep at the wheel while Sachdeva was stealing at least $31 million from them in a fraud scheme that lasted over five years.  And amazingly, the executives don’t seem to have plans to change much in wake of the fraud, as they stated in their most recent 10-Q (bold added by me):

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.

Continue reading

Compliance Week Article: Koss Fraud Spotlights Small Filers’ Internal Control Issues


An article in today’s Compliance Week, Koss Fraud Spotlights Small Filers’ Internal Control Issues (subscription required), quotes me on internal controls and the auditors as it relates to the huge fraud committed by VP of Finance Sue Sachdeva at Koss Corp (NASDAQ:KOSS).

I’m no fan of Sarbanes-Oxley because I believe it was ridiculously expensive, and hasn’t really produced any meaningful results. Fraud is just as rampant as before SOX became law, and the only thing companies have to show for it is a huge bill from auditors and consultants. Continue reading

Sachdeva and Koss Corp.: The Indictment, the Clothes, and the Auditors


handcuffsThe case of the alleged theft of at least $31 million by Sue Sachdeva from Koss Corp. (NASDAQ:KOSS) carries on. Last week, Sachdeva was charged with 6 counts of wire fraud. Experts are saying this indictment came much faster than usual, as the Feds usually spend much more time thoroughly investigating cases. They’re speculating that a guilty plea is going to come quickly, and the indictment was the first step toward that.

The indictment is interesting. Not only did she use company funds to pay her American Express bill as we had heard, she’s also been accused of getting cashier’s checks from a bank account belonging to Koss, writing Koss checks to Petty Cash and keeping the funds, and using Koss traveler’s checks for personal purposes. Continue reading