On September 2, 2010, the Securities & Exchange Commission brought an action against Sujata Sachdeva, vice president of finance, and Koss senior accountant and subordinate, Julie Mulvaney, who allegedly helped her cover up the fraudulent scheme. The SEC alleged that Sachdeva and Mulvaney caused Koss to submit false and misleading financial statements. Sachdeva regularly relied on Mulvaney to reconcile the cash shortfalls and to balance the books.
Sachdeva and Mulvaney primarily hid the embezzlement by making false entries on the Company’s general journal. For example, the false journal entries disguised the theft by overstating assets, expenses, and cost of sales, and understating liabilities and sales. Mulvaney maintained binders that detailed numerous false journal entries that were made to the Company’s accounting books and records. With those entries, Mulvaney reclassified Company funds-with no supporting documentation and no legitimate explanation. Mulvaney also maintained a series of folders that included documentation of over 100 fraudulent transactions that were included in the Company’s accounting books and records.
Sachdeva and Mulvaney were able to hide the substantial embezzlements in part because the Company did not adequately maintain internal controls to reasonably assure the accuracy and reliability of financial reporting. Koss’s internal controls policy required Michael Koss to approve invoices of $5,000 or more for payment. However, Koss allegedly delegated duties typically done by the CFO to Sachdeva on a regular basis. Koss also had little or no educational background or experience in accounting or finance. Many of the cashier’s checks exceeded $5,000, and some exceeded $100,000. However, its controls did not prevent Sachdeva and Mulvaney from processing large wire transfers and cashier’s checks outside of the system to pay for Sachdeva’s personal purchases without seeking or obtaining Michael Koss’s approval. In addition, many account reconciliations were not prepared, maintained, or reviewed as part of Koss’s accounting records. Koss’s computerized accounting system was almost 30 years old.
Required:
a. List the major internal controls that were absent within Koss Corporation’s internal control system.
b. What internal controls should have been implemented or applied to ensure proper controls over the Company’s recorded transactions?
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