MSF 702 A Professor Johnson

Analysis of Sujata
Sachdevas $3 Million
Fraud at !oss
"or#oration
Pre#ared $y% Ashley &' !innear
A#ril () 20(
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
A. Description of the Fraud
Koss Corporation is a manufacturer of household audio and video equipment that was
subjected to an SEC investigation after the Vice President of Finance and Principal Accounting
fficer embe!!led millions of compan" dollars to subsidi!e a life of lu#ur"$ Sujata Sachdeva
concealed her theft of compan" funds in Koss%s financial statements in concert with Koss% Senior
Accountant& 'ulie (ulvane"$ )his concealment was achieved through various financial statement
fraud techniques& including overstating assets& e#penses and cost of sales& and understating
liabilities and net sales$
Sachdeva%s fraud began in *++,& according to the SEC& and lasted through *+-+ when the
fraud was discovered b" American E#press$ .pon disclosure of the fraud& Koss restated their
financial statements for *++/& *++0 and the first 1 quarters of *+-+$ 2uring this time Sachdeva
embe!!led funds from Koss Corp through the use of cashier%s chec3s& unauthori!ed wire
transfers and unauthori!ed pa"ments from pett" cash$ 'ulie (ulvane" helped to conceal
Sachdeva%s fraud b" creating false journal entries in Koss% financial statements$ 4t is estimated
the twosome was able to embe!!le appro#imatel" 51-&6++&+++ from Koss$
As managers of a public compan"& Koss e#ecutives are required to issue an Annual
7eport on 4nternal Controls over Financial 7eporting& in which the" discuss the adequac" of the
compan"%s internal controls$ 4n this report for *+-+& Koss management concluded that internal
controls and operating procedures were circumvented during the fiscal "ear and that this
circumvention was concealed from management$ According to Koss% *+-+ -+ K8A& Sachdeva
and (ulvane" circumvented the internal controls at Koss& in the following areas9
1. Auditor Review
Koss% former independent auditor& :rant )hornton& ;;P& did not detect the circumvention
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
of Koss% internal controls and procedures as part of the Compan"%s annual audits or quarterl"
reviews$ Koss Corp filed an action against :rant )hornton& ;;P in *+-+$
2. Wire Transfers and Cashier s Checks
Sachdeva and (ulvane" misappropriated appro#imatel" 51+&0++&+++ or 0/$-< of the
total 51-&6++&+++ of unauthori!ed transactions from *++, to 2ecember of *++0 b"
circumventing Koss% internal controls using wire transfers or cashier%s chec3s from the
Compan"%s ban3 accounts to pa" for personal e#penditures$
f the 51+&0++&+++& appro#imatel" 5/&6++&+++ was misappropriated b" use of these
methods during *++0 and 5-+&1++&+++ during *+-+$ .nauthori!ed transactions were processed
after Sachdeva and (ulvane" circumvented Koss% invoice polic"& which requires all invoices
with dollar values over 56&+++ to be submitted and approved b" (ichael Koss& CE& and all
accounts pa"able chec3s generated from Koss% accounts pa"able s"stem to be signed b" (r$
Koss$
Additionall"& wire transfers were to be used onl" for authori!ed transactions including
certain inventor" purchases and transfers of funds between Koss% ban3 accounts$ =ire transfers
for inventor" purchases and the recurring e#pense items required the approval of several
emplo"ees including authori!ed Vice Presidents& while the wire transfers between compan" ban3
accounts were to be processed and approved b" Sujata Sachdeva and 'ulie (ulvane"$
(s$ Sachdeva ordered cashier%s chec3s from Koss% ban3 accounts to pa" for personal
e#penditures directl"& effectivel" circumventing the internal controls and procedures as described
above so that these pa"ments would not be processed through Koss% normal accounts pa"able
s"stem$
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
3. Pett Cash! "anua# Checks and Trave#er s Checks
)he 5>++&+++ balance of (s$ Sachdeva%s misappropriations& or -$0< from the total
amount of 51-&6++&+++& was embe!!led through circumvention of Koss% internal controls and
other standard operating procedures surrounding pett" cash& manual chec3s& and traveler%s
chec3s$ Koss% policies required that all e#pense reports be submitted and approved b" (r$ Koss
but due to Sachdeva%s fraud& this often did not occur$ ut of the 5>++&+++ of these t"pes of
fraudulent transactions& appro#imatel" 50-&+++ was ta3en during *++0 and appro#imatel"
5-+?&+++ ta3en in *+-+$
$. Recordin% of &nauthori'ed Transactions
(s$ Sachdeva and (s$ (ulvane" concealed unauthori!ed transactions b" creating fa3e
accounting entries in various accounts to hide the fraudulent nature of their transactions$
(. Perfor)ance and Review of Account Reconci#iations
)he Compan"%s internal controls and procedures included the performance and review of
reconciliations on 3e" accounts b" accounting department emplo"ees& including (s$ Sachdeva
and (s$ (ulvane"$ 4n addition to the creation of false journal entries& Sachdeva and (ulvane"
were able to conceal their unauthori!ed transactions b" avoiding the performance and review of
these 3e" account reconciliations on a regular basis and b" failing to properl" perform Koss%
period end financial close and reporting processes that were designed to accuratel" report Koss%
financial position$
*. Corporate +tandards and Whist#e,#ower Po#ic
)hose emplo"ees involved in the continuance of the fraud failed to compl" with Koss%
established integrit" standards& ethical values& Code of Conduct& and Code of Ethics and
=histleblower polic"$
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
-. App#ication of .AAP
)hose emplo"ees involved in the perpetration of the fraud& including (s$ Sachdeva& as
the principal accounting officer in charge of financial reporting& failed to properl" appl" Koss%
established accounting policies and neglected to adhere with the principles of :AAP$ Certain
accounting policies were not applied correctl"& which resulted in financial statement
inaccuracies$ )he affected accounts included equipment and leasehold improvements& cash
surrender value of life insurance& accrued deferred compensation& accrued product warrant"
obligations and income ta#es pa"able$ 4n *+-+ theses accounts were reviewed in detail and
reconciled as part of the restatement of the consolidated financial statements$
/. 0nfor)ation Techno#o%
;astl"& Koss% internal controls and procedures relating to the enterprise computer s"stems
for processing Koss% financial transactions were manipulated to conceal unauthori!ed
transactions$
1. The Fraud Trian%#e 2 Red F#a%s of Fraud
Fraud Triangle
)he three elements of the Fraud )riangle @pportunit"& (otivation and 7ationali!ationA
are not straightforward in Sujata Sachdeva%s perpetration of fraud at Koss Corp$ )he clearest
element is that of opportunit"& which (s$ Sachdeva and (s$ (ulvane" certainl" had an
abundance of$ pportunit" refers to a position of trust within an organi!ation and the s3ill set
required to conduct the fraud$ (s$ Sachdeva was a trusted emplo"ee at Koss Corp& as made
obvious b" her significant role within the compan" as acting VP of Finance and Principle
Accounting fficer& in which she directed most accounting personnel and reported directl" to
compan" e#ecutives& such as (ichael Koss& CE$
(ichael Koss was tas3ed with approving large invoices& reviewing post8closing journal
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
entries and certif"ing quarterl" and annual financial reports& which is where Sachdeva was
presented with her opportunities to misappropriate compan" funds$ (r$ Koss trusted Sachdeva
entirel"& ma3ing him feel comfortable enough to not perform detailed reviews of her job
performance or appl" s3epticism to her curious spending habits$
Sachdeva was well compensated for her responsibilities at Koss Corp and her husband
was a successful ph"sician and law"er$ )he Sachdeva%s combined annual income was in the
hundreds8of8thousands and the" were considered among the upper echelon of the :reater
(ilwau3ee Area$ For these reasons& Sachdeva%s motivation to perpetrate a multi8million dollar
fraud must have stemmed from a significant amount of greed$ 4n order to remain among the top
tier of societ"& Sachdeva li3el" felt a need to ensure that she maintained a lavished lifest"le in
order to B3eep up with the jones$C
7ationali!ation of fraud for the majorit" of fraudsters& according to Forensic Accounting
and Fraud Examination& stems from a feeling of being owed something& the perception that the"
are not hurting an"one or that the" are simpl" borrowing the mone"$ Decause it is difficult to sa"
with certaint" e#actl" how (s$ Sachdeva rationali!ed her actions in the Koss fraud case& one
would sa" it is li3el" that she used one of the aforementioned rationali!ations to justif" them in
her own mind$
Red Flags
)he first red flag& according to Daily Finance& the federal criminal complaint states that
there were several large piles of clothing with tags still attached sitting in Sachdeva%s office&
including various individual items priced in e#cess of 5*&+++$
A second red flag that should have alerted management to Sachdeva%s fraud was the large
and unusual transactions occurring within Koss% ban3 account$ )he SEC%s complaint states that
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
two of the wire transfers made b" Sachdeva and (ulvane" totaled an alarming 5-&+-/&606$ 4n
addition to this& management should have noticed the pett" cash account transactions credited
below the 56&+++ threshold initiated b" Sachdeva$ Appro#imatel" 510+&+++ was misappropriated
b" Sachdeva through this cash account& showing that e#ecutives did not supervise or perform
random reviews as the" should have$
(oreover& the hundreds of fraudulent entries made b" Sachdeva and (ulvane" over 6
"ears& man" of which were made post8close& were glaring red flags that should have alerted (r$
Koss as well as the e#ternal auditors to the fraud$ =hile e#ecutive management ma" not have
been complicit in the fraud& it is hard to argue that the" are blameless after evaluating the man"
red flags of this case$
C. Financia# +tate)ent 3va#uation
34hi,it 1 5 6oss Corps A)ended 0nco)e +tate)ent for 277/ and 2778
ne of the methods that Sachdeva and (ulvane" used to cover up the fraud& according to
the SEC%s complaint& was to reclassif" cash as sales& which resulted in an understatement of the
overall net sales figure$ Eet Sales were restated b" 5*&-,-&+*/ in *++/ and 51&61*&0>, in *++0$
Sachdeva and (ulvane" made false entries to increase the Koss ban3 account and C:S&
while decreasing accounts receivable& inventor" and finished goods$ )hese entries were made to
3eep the inventor" balance in s"nc with the false journal entries that reduced sales and increased
cost of sales$ A decrease in cost of goods sold totaling over 5*$?6 million in *++/ and *++0
combined was reali!ed as a result of the amendments to Koss% financial statements$
Another item that stands out in 34hi,it 1 is the line item titled& B.nauthori!ed
)ransactions$C )his item had a recorded value of 56&+00&0++ in *++/ and 5/&,0/&,1, in *++0$
)his means that in *++/& Sachdeva processed unauthori!ed transactions for personal benefit that
totaled -+< of net sales and *+< of net sales in *++0$
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
;astl"& an important adjustment was made to Koss% EPS in *++/ and *++0$ EPS had a
*1< decrease in *++/& diving from 5+$>- to 5+$,?& while the same figure was adjusted ---< in
*++0& dipping into the negative numbers& indicating a 5@+$+1A loss per common share$
34hi,it 2 5 6oss Corps A)ended 1a#ance +heet for 277/ and 2778
Sachdeva and (ulvane" also altered the financial statements b" decreasing accrued
liabilities and decreasing Koss% ban3 account$ 34hi,it 2 shows a cumulative increase in restated
accrued liabilities of 5/,6&*** in *++/ and 501>&0>6 in *++0$
Koss% current ratio was negativel" impacted b" the restatement& decreasing ,>< from
,$1* to *$1*$ Current assets decreased b" 5*&>?+&++6 in *++/ and b" 5,&>+-&6>0 in *++0& while
current liabilities increased b" 5-+&-,6&,,* in the same two "ears$ )his caused a sharp decrease
in Koss% current ratio& indicating that the compan" is less able to pa" their current liabilities than
originall" reported$
34hi,it 3 5 6oss Corps A)ended +tate)ent of Cash F#ows for 277/ and 2778
)he net changes in operating assets and liabilities saw a huge increase of 0&?0*< in *++/
going from 5@-/&661A to 5-&/16&*?> and an increase of 6+*< in *++0 going from 5@>10&+-/A to
51&/,0&?,6$
;astl"& a 6?,< increase in the provision for doubtful accounts resulted from the financial
statement amendment in *++/ and *-0< in *++0$
D. 0ncentive Co)pensation
Management Compensation
Sujata Sachdeva was the onl" manager directl" involved in the pepetration of fraud$
=hile the SEC did charge (ichael Koss in the case& the allegations against him pointed to his
oversight functions not to an" participation in the fraud scheme$ Sachdeva%s compensation for
the "ears *++/ and *++0 are illustrated below& as well as her percentage of ownership in
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
outstanding stoc39
4t is important to note that the nature of Sachdeva%s fraud was not to improve Koss%
financial position$ 4f that was the case& Sujata%s compensation incentives ma" have pla"ed a
crucial role in understanding her motivation$ 4n actualit"& Sachdeva%s scheme was centered on
embe!!lement& the theft of funds for the purpose of personal reimbursement$ 4n fact& in *++0&
Sujata%s scheme resulted in poorer financial results for Koss& proving her incentives for
perpetrating fraud were not rooted in benefits stemming from compensation$
3. 0)pact on +hareho#der Wea#th
According to Koss% restated financials& their earnings per common share dropped *1< in
*++/& from 5+$>- a share to 5+$,?$ 4n *++0& earnings per share dropped from 5+$*? to 58+$+1& a
dramatic reduction of ---<F Gowever& Koss Corp$%s stoc3 price did not see a considerable
decline after the fraud was announced and the statements were amended$ Yahoo! Finance shows
that& aside from a high stoc3 price of 5? in the beginning of *++/& Koss stoc3 prices have
remained between 5,$++ and 5>$++ from the end of *++/ to the beginning of *+--$ )his
consistenc" is li3el" due to the fact that a single emplo"ee and her staff assistant were
responsible for the fraud and that the intention of the fraud was personal financial benefits gained
b" embe!!ling funds as opposed to earnings management or a revenue related fraud$ Eow that
Sachdeva and (ulvane"%s emplo"ment has been terminated& Koss Corp is free of the fraud
perpetrated b" the two women and more alert to the need for sound internal controls$ )his
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MSF 702 A April 14, 2014
indicates to shareholders that Koss will be a financiall" healthier compan" and& therefore& boosts
comfort in shareholders that the compan" will be able to provide a return on investment$
F. The Characters 0nvo#ved
1. Sujata Sachdeva! VP of Finance & Principle Accounting Officer
Sujata Sachdeva& who began her career at Koss in -00*& had a reported salar" @including
bonuses& e#cluding stoc3 optionsA of 5-,6&+++ with a little less than 51+&+++ in outside
compensation in *++0$ At the time of the fraud%s occurrence& (s$ Sachdeva was married to
7amesh Sachdeva& an established ph"sician at Children%s Gospital of =isconsin and an attorne"$
)he Sachdeva famil" maintained a lifest"le of considerable comfort& gave to man" charitable
organi!ations& performed an abundance of volunteer wor3 and communit" service and enjo"ed
the compan" of man" peers and friends who all thought of Sujata Sachdeva as an upstanding
woman$
)he Sachdeva famil" was 3nown for their considerable contributions to man" charitable
causes& including )he Do"s H :irls club& Dig Drother Dig Sisters& Cardinal Stritch .niversit"&
S3"light pera )heater& )he Gindu )emple of =isconsin& and an effort b" the =isconsin
Coalition of Asian 4ndian rgani!ations that provided defibrillators to public schools in
(ilwau3ee& according to the Milwaukee Journal Sentinel$ (an" co8wor3ers& interviewed b" the
Milwaukee Journal Sentinel& stated that the" were shoc3ed b" the allegations& and never noticed
an" fraudulent red flags in Sachdeva%s character& despite her strange and obvious wealth$
(oreover& Sachdeva spent two "ears caring for her elderl" mother8in8law& which is something
that famil" friends sa" was reflective of her 3ind and selfless personalit"$ ne friend of the
Sachdeva famil" commented9 B4f she did something& it%s unfortunate& but she had so man"
positives attributes in life that we were ver" proud of$C
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
Business Insider determined that the items purchased b" Sachdeva using ill8gotten gains
from Koss Corp& include a 5**6&+++ shopping spree at Karat ** 'ewelers& an estimated 5-$,
million dollar bill for clothing purchased at Valentina Doutique& 5>,0&+++ spent at the =hitefish
Da" bridal store and a 5>?+&+++ shopping spree at Au Corant boutique in (ilwau3ee$ )he article
goes on to state that Sachdeva spent so much mone" at her favorite clothing retailers that she
requested store8owners hold on to her purchases until she could find space for them in her home$
Federal agents also investigated a number of storage facilities& opened and rented b" Sujata
Sachdeva that were used to store additional purchases that could not fit in her home or her office$
2. Julie Mulvaney, Senior Accountant
'ulie (ulvane" is a resident of (ilwau3ee& =isconsin$ (ulvane" was acting Senior Accountant
from Koss Corp from *++- to *+-+$ )his position made (s$ (ulvane" responsible for ma3ing
journal entries& reconciling accounts receivable and Koss% ban3 statements& ordering cashierIs
chec3s& processing wire transfers& and chec3ing the dail" ban3 account balances$ 2uring her time
as Senior Accountant& (ulvane" reported directl" to Sujata Sachdeva$ For her part in the fraud at
Koss Corp& the SEC charged (s$ (ulvane" with preparing materiall" false accounting records
through the use of fraudulent journal entries in order to disguise Sujata Sachdeva%s
misappropriation of compan" assets$ (s$ (ulvane" colluded with (s$ Sachdeva to hide the
embe!!lement of compan" funds through overstatements of assets& e#penses and cost of sales& as
well as manipulations of liabilities and sales accounts$ Koss Corp e#ecutives terminated 'ulie
(ulvane" on 'anuar" ,& *+-+ and she has been banned from appearing or practicing as a
consultant before the .$S$ Securities and E#change Commission$
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
3. Michael Koss, Chief Executive Officer
(ichael Koss has been the President and Chief perating fficer of Koss Corp$ since
-0/? and its Chief E#ecutive fficer since -00-& when he succeeded his father at the head of the
compan"$ (r$ Koss served in various senior management positions including (ar3eting&
perations and Corporate 2evelopment$ Ge has been Vice Chairman of Koss Corp$& since -00/
and its 2irector since -0/6$ (r$ Koss% total calculated compensation for the fiscal "ear end of
*+-1 was 50**&+*-$
(r$ Koss did not escape Sachdeva and (ulvane"%s fraud unscathed& as the SEC filed a
lawsuit against him& alleging that (r$ Koss aided and abetted Koss Corporation$ 4t is important to
note that SEC does not state the (r$ Koss aided and abetted Sachdeva nor (ulvane"$ )he SEC
also charged (r$ Koss with violations of regulations regarding his certification of the
Corporation%s -+ K and -+ K8S from *++, through *+-+$ According to the Fraud Files Blog and
the SEC complaint& (r$ Koss Bdid not conduct an adequate review of Koss%s accounting in
connection with these certifications$C For this reason& (r$ Koss was required to reimburse Koss
Corp$ over 5*++&+++ in cash and 5->+&+++ in stoc3 options$
.. Tone at the Top
)here are a number of areas in the case of Koss Corp where tone at the top was lac3ing$
Ethics and due diligence seemed to have been the most distant thoughts for e#ecutive
management of Koss Corp during the time that Sachdeva was misappropriating assets$ )he
primar" issues with setting the tone at the top of the compan" include adherence to corporate
policies concerning ethics and integrit"& (ichael Koss% role as CE and Sujata Sachdeva%s role
as VP of Finance and PA$
Koss Corporation possessed appropriate policies for integrit" and ethical conduct within
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
the organi!ation$ Sachdeva%s fraud was not the product of poor& or inappropriate& policies& but
instead a lac3 of ethics and adherence to these policies b" 3e" emplo"ees& such as Sachdeva&
(ulvane" and Koss$ =hile Koss Corp management did state& in their -+ K8A& that the" would
BreinforceC their policies with their emplo"ees& the" did not feel it was necessar" to overhaul and
recreate compan" policies related to ethics and integrit"$
(ichael Koss did not activel" participate in the perpetration of fraud at Koss Corp& but
rather& lac3ed appropriate supervision practices in his role as acting CE$ 4n the SEC%s
complaint against (ichael Koss& the Securities and E#change Commission alleged that his lac3
of proper reviews and authori!ations led to Sachdeva%s opportunit" for theft$ Koss% blind trust in
his VP of Finance and her management of the accounting department led (r$ Koss to perform
inadequate reviews of compan" statements and supporting financial information$ 4f (ichael
Koss had been a prudent CE b" supervising his staff and e#ecuting his duties to the best of his
abilit"& Sachdeva%s opportunit" for circumventing internal controls would have been reduced&
possibl" deterring her fraud$ 4nstead& (r$ Koss failed to perform the responsibilities required of
his crucial position& giving off the impression that fraud detection was unli3el"& which in turn led
to the fraud that damaged the reputation of his father%s compan" as well as cost the compan"
51-&6++&+++$
Sujata Sachdeva%s role as VP of Finance and PA was the primar" vessel for her fraud
perpetration& alluding to the poor tone at the top set for Koss emplo"ees$ Acting as Vice
President of Finance& as well as being the Principle Accounting fficer& Sachdeva carried out
fraudulent activities and directed her assistant to collude in fraud perpetration with her$ As a
trusted emplo"ee and mentor to 'ulie (ulvane"& Sujata Sachdeva set the tone at the top for Koss
Corp to foster e#tremel" unethical behavior$
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
9. Preventin% the Fraud
4n their amended financial statements& Koss Corp$ e#ecutive management outlined
specific remediation steps ta3en after the fraud occurred$ 4n a perfect world where Koss Corp
implemented and tested effective internal controls& these remediation steps would have been
ta3en to prevent fraud& rather than allow it to continue for 6 "ears$ )he following is summar" of
actions ta3en b" Koss Corp (anagement after the fraud occurred$
-$ Fraudu#ent Wire Transfers 2 Cashiers Checks9
o disallow the use of an" cashier%s chec3sF
o enforce that all wire transfers are initiated within the financial function
and electronicall" approved b" the CE
o perform an enhanced review& reconciliation and reporting of cash
activities$
*$ Pett Cash! "anua# Checks and Trave#ers Checks 0ssues9
o eliminate the pett" cash fund so all reimbursements run through normal
controlled accounts pa"able channels
o eliminate the use of manual chec3s so all chec3 disbursements are
generated from the Compan"%s accounts pa"able s"stem chec3 run
o eliminate the use of traveler%s chec3s$
1$ Recordin% of &nauthori'ed Transactions9 )he Compan" has improved the controls and
procedures related to journal entries and account reconciliations to include improved
segregation of duties& review and approval of reconciliations& and approval of all manual
journal entries$
,$ Perfor)ance and Review of Account Reconci#iations9 )he account reconciliation
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MSF 702 A April 14, 2014
process has been improved to include proper segregation of duties and a review and
approval b" an independent person in the financial function$
6$ Corporate +tandards and Whist#e,#ower Po#ic9 )he Compan" has ta3en steps to
reinforce their policies of integrit" and ethical values with its emplo"ees& officers and
directors$ )he compan" has also reinforced their =histleblower and Code of Conduct
policies$
>$ 0nfor)ation Techno#o%9 Koss Corp planned to implement a new computer s"stem that
to be used for improve its processing of financial transactions and overall segregation of
duties in the end of *+--$
0. After the Fraud
=hile the fraud perpetrated b" Sachdeva and (ulvane" damaged Koss%s public image
and negativel" impacted their financial statements from *++, to *+-+& its impact on the compan"
is dwarfed in comparison to that of other corporate frauds& such as Enron and Adelphia$ (ichael
Koss commented on the financial impact of the fraud in a press release& stating& B:iven that
certain unauthori!ed transactions were concealed in the Compan"Is sales and cost of sales
accounts& our sales were higher and our cost of sales was lower than previousl" reported in both
*++0 and *++/$ )his correction has revealed an increase in gross margins for our
Compan"$ From this perspective& the Compan"Is performance was actuall" stronger than
originall" reported$J
A (ilwau3ee Business Journal article reports that Koss Corp recovered onl" 5?$? million
of the 51-$6 million that was embe!!led b" Sachdeva$ Appro#imatel" 56 million of this came
from insurance proceeds& with an additional 5>,+&+++ of proceeds from the sale of Sachdeva%s
purchases$ 4t is important to note that the loss for Koss goes further than the funds actuall" stolen
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
b" Sachdeva& as the compan" has spent nearl" 5?$6 million in legal services fees for the
numerous lawsuits and court proceedings& as well as accounting fees for the large8scale financial
restatements$
Business Journal goes on to state that positive results of the fraud include an increase in
operating income of 5-$- million& a net benefit of 5/*>&-/1 for the fiscal "ear ended 'une 1+&
*+-- and recoveries of 5,+-&+++ from Sachdeva%s ,+-3 and 5*++&+++ from (ichael Koss$
Koss Corporation has remained a going concern& and continues to manufacture and sell
consumer electronics and accessories$ Koss% stoc3 price per share has remained consistent for
their industr" and has not e#perienced a noticeable decline following the disclosure of the fraud
in *+-+& as noted in the B4mpact on Shareholder =ealthC section above$
Koss Corp is still going through legal proceedings with Par3 Dan3& whom the compan"
filed a suit against for failing to detect the fraud earlier& claiming the ban3 should have noticed
the large amount of wire transfers routed from Koss% ban3 account$ According to Milwaukee
Business Journal& a scathing report from 7ichard Dreeden& an e#pert hired b" Par3 Dan3& places
the blame for Sachdeva%s fraud on (ichael Koss and the Koss Corp Doard of 2irectors$ Dreeden
is claiming that neither (ichael Koss no Sujata Sachdeva were qualified to perform their job
functions and that the board made no attempt to oversee management during the e#ecutives% time
in the compan"$ Dreeden states& BA competent CE& let alone a CE and CF& would have
understood the importance of periodicall" evaluating whether the compan"%s internal controls
actuall" wor3edK Let whatever ($ Koss did to fill his da"s& he admits in his deposition that he
never read one of the compan"%s ban3 statements& and he apparentl" never reviewed a list of all
cash transfers out of the compan" either$C (uch of the information that can be found
surrounding the Koss vs$ Par3 Dan3 trial seems to agree with (r$ Dreeden%s position that
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
(ichael Koss is to blame for failing to recogni!e the fraud& not Par3 Dan3$ A pre8trial conference
trial was held on 'anuar" ?
th
& *+-, and the case continues to be open$

E#hibits
-$ Amended Statement of 4ncome *++/8*++0
*$ Amended Dalance Sheet 4nformation *++/8*++0
1$ Amended Statement of Cash Flow 4nformation *++/8*++0
ources
6:++ C:RP! For) 17;6<A @Amended Annual e!ortA
Filed ctober -*& *+-+ for the Period Ending 'une 1+& *+-+
&.+. +ecurities and 34chan%e Co))ission! =SE" "harges #wo Accounting $ro%essionals at
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
Milwaukee&Based "om!any with Fraud.>
Aug$ 1-& *+-+
@Milwaukee&'isconsinA ?ourna# +entine#& B(oss sus!ect !rominent in social) charita*le circles$C
'an$ -?& *+-+
&.+. +ecurities and 34chan%e Co))ission& B+itigation elease ,o- ./0123 SE" "harges 4%%icer and
Em!loyee o% Milwaukee "or!oration in 562 Million Em*e77lement$C
September -& *+-+$
1#oo),er% 1usinessWeek& BExecuti8e $ro%ile3 Michael J- (oss$C
Apr$ -?& *+-1
The Fraud Fi#es 1#o%& B'hen Em!loyees Steal) the SE" May $unish the "om!any and the "E4$C
2ec$ >& *+--
1usiness 0nsider& B9ow to Steal :6/ Million %rom Your "om!any) ;o on a +uxury Sho!!ing s!ree) and
,early Bankru!t Your Firm$C
@ 'an$ >& *+-+
6oss Press Re#ease& B(oss estatements "hronicle Accounting De!artment "ollusion$C
@ 'une 1+& *+-+
&.+. +ecurities and 34chan%e Co))ission& B"om!laint Against (oss "or!oration and Michael J-
(oss$C
@ ctober *,& *+--
Dai# Finance& B(oss< 5.2 Million Em*e77lement Should Be a 'ake&=! "all to Execs$C
@ 'an$ ,& *+-+
The 1usiness ?ourna# @Milwaukee>& B,ot ,early Enough3 (oss eco8ers 5?-? Million o% Sachde8a
Funds$C
Ashley Kinnear Professor Johnson
MSF 702 A April 14, 2014
@ (a" -/& *+-*
The 1usiness ?ourna# @Milwaukee>) AScathing e!ort #akes (oss +eaders to #ask in Sachde8a "ase-A
@ September *+& *+-1