Headphone Maker Hears the Sound of Accounting Fraud

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On Christmas Eve, Koss Corp. fired its vice president of finance for allegedly embezzling up to $31 million over a period of five years from the headphone company, and on New Year's Eve it dismissed its auditor too.

The case could have ramifications in the debate over Sarbanes-Oxley Section 404 compliance, and whether the rules should apply to smaller public companies, according to an interesting account on CFO.com. If Koss had better internal controls in place, it might have discovered the fraud sooner.

The company finally dismissed Sujata Sachdeva, who served as the company’s principal accounting officer, only after federal prosecutors charged her with embezzlement. Sachdeva allegedly spent $4.5 million of Koss’s money on shopping sprees around Milwaukee buying up jewelry, fur coats, and fashions. Koss only learned of the embezzlement after American Express informed the company of several expensive wire transfers that Sachdeva made from the company’s bank account to her personal Amex account.When it checked her office, it found some of the items still in their shopping bags with the expensive price tags attached.

The company fired its outside auditor, Grant Thornton, on New Year’s Eve, but the firm noted in its defense that Koss’s level of revenues did not subject the company to Sarbanes-Oxley 404 internal control audits, and the headphone maker never engaged Grant Thornton to conduct an audit of its internal controls.

The SEC has delayed implementation of the SOX 404(b) requirements for smaller public companies several times, but in October it said that companies with a float below $75 million would need to begin complying with the auditor sign-off requirements. However, the financial regulatory reform legislation passed by the House last month contained a provision permanently exempting small companies from the requirements, which many have complained are expensive and onerous.

Proponents of SOX 404(b), however, are still hoping that the provision does not get included in the Senate version of the bill, which is still in the works and very much in play. That's especially true now, with Senate Banking Committee chairman Christopher Dodd’s recently announced retirement prompting fresh speculation on which provisions will be included or not included in the final legislation, particularly the creation of a Consumer Financial Protection Agency. The SOX 404 exemption provision may not get as much attention as the Consumer Financial Protection Agency part of the legislation, but it’s one that many accounting firms will be watching closely. The Koss case could give proponents of SOX 404 fresh ammunition to argue their case.

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