Koss management Case

1. Why might Koss management have placed so much trust in Sachdeva, along with minimal supervision and monitoring?

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Koss management might have placed so much trust in Sachdeva because she was is such a high position. She worked in the company as Vice President, when you are that high on the totem pole, you are given trust that you know what you are doing and that you want what is best for the company. Companies don’t hand out positions to people that have no clue as to what they are doing as well as someone that they believe will ruin the company. The same thing goes along with having minimal supervision and monitoring. She was a Vice President, someone that was supposed to be trusted, someone who was a leader, someone who was supposed to set an example. It just goes to show you that it is not always the person on the bottom of chain that needs to be watched. It is easier for higher up management and owners to sneak money away than the one who have minimal access to records and bank statements.

2. What was Grant Thornton’s obligation to uncover the fraud?

Grant Thornton was Koss’s internal auditor. An internal auditor is defined as “An independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.” (p. 23-24) As the auditor for this business, Grant was supposed to make sure that every piece of financial information was in its right place as well as wrote and calculated right. Clearly Thornton did not do his job the right way. By looking at the numbers provided, any auditor could see that something is not right in the company. After seeing it, the auditor would address the issue and deal with it the proper way. I have a feeling he knew all along what was going on but was too afraid to open his mouth.

3. Why should Sachdeva’s lavish lifestyle have raised suspicions? Why might it have been ignored or explained away by her professional colleagues?

Sachdeva’s lavish lifestyle should have raised red flags soon after it started to happen. It should because most people that work in a company roughly know how much each person makes. After seeing her spend the money she was someone should have investigated a little more. I mean it is possible for a Vice President of a company to be rich, but for a life style to go to the extreme as spending $1.4 million on a shopping spree is questionable. One of the number one ways to detect fraud is by a change in lifestyles. Her new lifestyle could have been ignored because of her job title. No one wants to question their boss, let alone someone higher up in management. By doing that, all you are asking for is to get fired. In the book it says that people assumed she used family money or her husbands, but not one person questioned her about it. (p. 116) No one wanted to be the one that was questioning the boss. It is much easier to turn and look the other way than stand up in what you believe.

4. How could management, the audit committee, and the auditors have been more professionally skeptical in this situation?

The audit committee and the auditors could have checked financial more often than what they did. When they noticed that the income was dropping quite a bit each year, they should have started looking at documents more closely as well as more often. The audit committee is supposed to speak with management on their findings. Well instead of talking to the President and Vice President, they should have only talked to the President. There was really no communication in this business when it came down to financials. It was basically whatever Sachdeva said was right. No one stepped up to double check her work and no one questioned it. Being a bigger company, more than one person should have defiantly doubled checked the financial statement.

5. What was the audit committee’s responsibility to notice that something looked amiss in the financial statements?

The audit committee’s responsibility was to look over the accounting and financial reporting process as well as the financial statement audits; appoint, compensate and oversee the external auditor; and to ensure that the company has a whistleblower program. (p. 52) At first glance the committee could notice that something was not right with the company’s financial records. But nothing was done and nothing was said.

6. Sachdeva paid for her purchases using corporate credit cards. What internal controls could the company have used to prevent inappropriate use of the credit cards?

One thing internal controls could have done was make Sachdeva turn in receipts along with a credit card statement at the end of each month. By doing this, every dollar spent on company card can be accounted for. You can see not only where the money is going but what the money is spent on as well as the date and time it was spent. This is just one simple way to keep fraud down. Many companies require this every month with their employees. For every transaction where a receipt cannot be present is deducted from their pay check. Another thing the company could have done is set a limit on the card. By setting a limit, you can make sure amounts are not being spent that shouldn’t be.

7. Some reports have described Sachdeva as having a very dominating personality, and revelations were made about the fact that she would often be verbally abusive of her subordinates in front of top level managers at Koss. How should top-level managers have responded to this behavior? What actions could the subordinates have taken to respond to this behavior?

Top-level management should have put a stop to it right at the start. By allowing it to happen, shows her that it was ok. If they would have stated something in writing and verbally, she may have either stopped or possibly could have be let go. Also by allowing this to happen, shows other employees that it is completely ok to act the way to other employees as well as people above her. Some actions that defiantly should have been taken would be to sit her down and just talk to her and let her know that it is not acceptable in the company, especially to her bosses. The next action would be like I said to have something in writing and have her sign it. Not only does this cover the company’s butt, but you have the proof that you said something to her. By doing this, she cannot come back and say that she wasn’t aware she was verbally abusing anyone and that nothing was brought up to her.

Rittenburg, Larry. Johnstone, Karla. Gramling, Audrey. (2012) Auditing: A Business Risk Approach 8e. Mason: South-Western, Cengage Learning.

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