U. S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22138 / October 24, 2011
Accounting and Auditing Enforcement Release No. 3330 / October 24, 2011
SEC v. Koss Corporation and Michael J. Koss, Civil Case No. 2:11-cv-00991, USDC, E.D., Wisc.
SEC FILES COMPLAINT AND PROPOSED SETTLEMENT AGAINST KOSS CORPORATION AND MICHAEL J. KOSS, ITS CEO AND FORMER CFO, WHO HAS AGREED TO REIMBURSE INCENTIVE-BASED COMPENSATION
The Securities and Exchange Commission (“Commission”) on October 24, 2011, filed a Complaint against, and proposed settlement with, Koss Corporation (“Koss”), located in Milwaukee, Wisconsin, and Michael J. Koss, its CEO and former CFO, based on Koss Corporation’s preparation of materially inaccurate financial statements, book and records, and lack of adequate internal controls from fiscal years 2005 through 2009. During this period, Sujata Sachdeva (“Sachdeva”), Koss’s former Principal Accounting Officer, Secretary, and Vice-President of Finance, and Julie Mulvaney (“Mulvaney”), Koss’s former Senior Accountant, engaged in a wide-ranging accounting fraud to cover up Sachdeva’s embezzlement of over $30 million from Koss. The Commission’s Complaint alleges that:
- The yearly amounts stolen were significant relative to Koss’s sales and shareholders’ equity. For example, during fiscal year 2009, Sachdeva stole approximately $8.5 million, while Koss reported total sales of approximately $41.7 million and retained earnings of approximately $17.1 million at year-end.
- Sachdeva and Mulvaney were able to hide the substantial embezzlements in Koss’s financial records in part because Koss and Michael J. Koss did not adequately maintain internal controls to reasonably assure the accuracy and reliability of financial reporting.
- While Koss’s internal controls policy required Michael J. Koss to approve invoices of $5,000 or more for payment, its controls did not prevent Sachdeva and Mulvaney from processing large wire transfers and cashier’s checks outside of the accounts payable system to pay for Sachdeva’s personal purchases without seeking or obtaining Michael J. Koss’s approval.
- As a result, Sachdeva, with Mulvaney’s assistance, was able both to initiate and authorize wire transfers of Koss’s funds to her personal creditors totaling approximately $16.3 million, and to order cashier’s checks payable to credit card companies and her designated payees totaling approximately $15.5 million.
- Koss’s computerized accounting systems were almost 30 years old and access to the accounting systems could not be locked at the end of the month and there was no audit trail. Sachdeva and Mulvaney were thus able to make undetected post-closing changes to the books and bypass an internal control requiring Michael J. Koss to authorize those changes.
- Many account reconciliations were either not prepared or were not maintained as part of Koss’s accounting records. To the extent that reconciliations were conducted, they were improperly performed by the same persons who initiated or recorded the transactions (i.e. Sachdeva or Mulvaney), enabling those persons to make modifications to the reconciliations to cover up fraudulent entries.
- While Sachedeva provided Michael J. Koss with reporting certifications for his review, he did not conduct an adequate review of Koss’s accounting in connection with these certifications.
- Based on the fraudulent accounting books and records prepared by Sachdeva and Mulvaney, Koss prepared, and Michael J. Koss certified, materially inaccurate audited financial statements and materially inaccurate current, quarterly and annual reports.
After discovering the embezzlement, Koss reported the occurrence to its shareholders and enforcement authorities, and amended and restated its financial statements for fiscal years 2008 and 2009 and the first three quarters of fiscal year 2010.
Koss and Michael J. Koss have consented to the entry of an injunctive order without admitting or denying the allegations in the Commission’s complaint. The proposed order would:
- Enjoin Koss from violating and Michael J. Koss from aiding and abetting violations of the reporting, books and records and internal controls provisions (Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11 and 13a-13) of the federal securities laws and Michael J. Koss from violating the certification provision (Section 13a-14 of the Exchange Act) and
- Order Michael J. Koss to reimburse Koss $242,419 in cash and 160,000 of options pursuant to Section 304 of the Sarbanes-Oxley Act. This bonus reimbursement, together with his previous voluntary reimbursement of $208,895 in bonuses to Koss Corporation represents his entire fiscal year 2008, 2009 and 2010 incentive bonuses.
In a related criminal matter in the U.S. District Court for the Eastern District of Wisconsin, on November 17, 2010, Sachdeva pleaded guilty to six counts of wire fraud and was ordered to pay $34 million in restitution and was sentenced to 11 years in prison.
The Commission acknowledges the assistance of the U.S. Attorney’s Office for the Eastern District of Wisconsin, the Federal Bureau of Investigation and the Public Company Accounting Oversight Board. The Commission considered the cooperation of Koss Corporation and Michael J. Koss in determining to accept their settlement.