Koss Corporation: Analytics Part A, D & E  Harvard Case Solution & Analysis

Koss Corporation: Analytics Part A, D & E  Case Solution

3) None of material weakness in the internal control was reported before the fraud was revealed,since the board was assuming that the effective systems of internal controls are placed to prevent any sort of fraudulent activity within the organization. The main reason could be the involvement of many executives in the fraudulent activities, including: Sue Sachdeva (former executive at Koss Corporation), Michael Koss (the son of the owner) and Julie Mulvaney (a co-worker of Sue). The override of the internal control, serious issues of governance and the segregation of the violation of duties were the core reasons behind the fraud, which was not revealed because Sue Sachdeva was the competent, responsible and trusted employee of the organization and he was colluding with Julie Mulvaney to cover up the fraud. Furthermore, Michael Koss was under the impression that the firm had a robust internal control system in place and he didn’t realize the need foran internal audit function and a close board oversight.

In addition to this, the material weakness in the internal control was reported after the fraud was revealed and when the fact resurfaced that it was not identified that the accounting systems of the company were adequately monitored and secured. Additionally, it was analyzed that the company didn’t have any IT policies & controls to monitor the network and application security violations. The failure of the executives in maintaining and implementing effective controls over the information system of the company in part, allowed Mulvaney&Sachdeva to carry out an accounting fraud and embezzlement.

Part E

  • At the time of the fraud, the financial performance of the company was pretty strong with a market capitalization of 75 million dollars,which shows that the company was experiencing many financial problem. Additionally, the defendants decided to conduct the fraudulent activity, because the policy of ethics and compliance of the board were limited and didn’t include any whistle-blowing policy. Furthermore, there wasn’t any internal control function reporting to the board in the organization and the computerized accounting system lacked the application controls and were extremely outdated. In the case of Koss Corporation; there were many external auditors on whom the company was relying, including: GT, LLP, and Grant Thornton. They were engaged in performing the professional audit of the company’s financial affairs company and had reached the conclusion that the company’s financial statements weren’t accurate. The auditors could conduct the fraud in a way that they have no information related to the business and had failed to meet the expectations of the company’s senior management. Later on, it had-appeared that they had failed to apply the audit standards during the company’s auditing by them. Grant Thornton had the motive to behave recklessly as he was earning more than 650,000 dollars in fees from the company, which in turn gave him an incentive to overlook the accounting policies of the company.(Officials, UNITED STATES DISTRICT COURT EASTERN DISTRICT OF WISCONSIN, 2015).
  • Regardless of the fact whether the auditor was named as a defendant; it should have caught the fraud through performing the audit engagements with the company in accordance with PCAOB & GAAS standards. The auditors should have caught the fraud by identifying the red flags, such as: circumvention of the internal controls as well as an occurrence of the unauthorized transactions. The auditor must successfully cross-check the bank records of the company against its internal journal entries and detect the violation of the company’s policy of requiring all invoices to be approved by the CEO. Grant Thornton was negligent in performing the audit and had failed to identify the red flags.

Since Mulvaney and Sachdeva were responsible to record and initiate the transactions, it enabled them to make modifications to the reconciliations in order to  make fraudulent and misstated entries, provides them an opportunity of manipulating the records as well as preparing the fraudulent financial statements by overriding the controls, and adding much to the fraudulent activities was the fact that the internal control systems also appeared to be operating in an inefficient manner.......................... 

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