Comments on: Defending Koss And Their Auditors: Just Loopy Distorted Feedback

By: re: The Auditors » Blog Archive » McKenna Quoted In California Lawyer Magazine

Mon, 02 Aug 2010 13:11:41 +0000

[...] month on “Ponzi’s Auditors” and I have two nice quotes. I’m talking about auditors’ responsibility for detecting fraud under SAS 99 and about the doctrine of “in pari delicto” as it relates to the AIG case against PwC [...]

By: James Feldman

James Feldman — Thu, 15 Jul 2010 18:24:18 +0000

It’s interesting (and ironic) to note that in January 2007, Koss’s external auditor, Grant Thornton LLP, was commissioned by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to develop guidance designed to help organizations monitor the quality of their internal control systems. Their end product was to serve as a tool for effectively monitoring internal controls, as well as complying with the U.S. Sarbanes-Oxley Act of 2002 (SOX).

By: Ken Biddick

Ken Biddick — Mon, 01 Feb 2010 21:44:31 +0000

Late again. Tracey and Francine have very good points regarding Koss management and internal control structure. This is, along with understanding Koss as a business, any auditor’s first and foremost duty, that of professional competence. Pretty much all the other things regarding SASs just add to the specific areas of incompetence.

Audits have always had the purpose of identifying errors and irregularities. The duty to report being a matter of materiality. In todays computerized records world analytics would have provided a simple path to focus audit efforts. For the remainder of areas simple statistical methods would have covered the remianing transaction base.

Basically, an audit makes assumptions regarding the reliability of both recorded and unrecorded transactions. When management and internal controls cannot reduce audit risk the auditor needs to perform the highest level of transactional testing. Auditors’ generally have failed to make the connection to rely solely on detection (audit risk) when controls are lacking, ineffective (management override), or inoperative.

As someone previously indicated, once you have assessed that management and the control environment are ineffective and possible even obstructive a reasonable auditor would decline the engagement or recognize the risk and plan the audit accordingly.

By: Sachdeva and Koss Corp.: The indictment, the clothes, and the auditors : Sequence Inc. Fraud Files Blog

Thu, 28 Jan 2010 13:52:19 +0000

[...] It’s easy to say that the auditors should have caught the fraud. That’s said all the time when a big fraud hits the media. But the fact is that audits rarely find fraud, and relying on the auditors to find fraud is silly. Sure, we can think of a bunch of ways that auditors could have found a fraud if they looked in the right places. But the auditors are not finding fraud. Let’s stop pretending that auditors do find fraud, because they don’t. Related Posts [...]

By: Jim Mullett

Jim Mullett — Tue, 26 Jan 2010 17:36:55 +0000

This highlight one reason why not all CPA’s are crazy about moving to IFRS. The current GAAP rules are rules based while IFRS is more principles based. Auditors have much more to hang their hat on when getting sued if they can prove that they have complied with the “rules” of the profession. “Principles” are much harder to hang their hat on.

By: David

David — Mon, 25 Jan 2010 03:22:21 +0000

Tracy: If my hypothesis regarding how she attempted to hide the fraud is correct, then the fraud did result in a material misstatement of the balance sheet. Why would a manufacturer have 5 months of inventory on hand? (Inventory of 9.7 million divided by cost of goods sold of 24 million) Why would the inventory turns be reduced to close to 2 per year? And, why were accounts payable reduced so much from the prior year? And, what’s with the large increase in tools and dies? Even if the CPA were only doing a review and not an audit, there are red flags that should have caused this fraud to be detected.

Independent Accountant: I am of the belief that most frauds could be detected through a thorough review of the financial statements and other analytical procedures and that most financial statement frauds could be spotted without an audit. Examples of such frauds are those at Worldcom, Global Crossing, Qwest, Sunbeam and Crazy Eddie. It sounds reasonable to me that this fraud could have been detected with a test of expenditures.

You also have to question how management never discovered her thefts considering how much she was stealing.

By: MyWhistleTweet

MyWhistleTweet — Sun, 24 Jan 2010 03:20:43 +0000

In some news reports, there was some mention of some other employees who have been suspended/fired. It is doubtful that the VP Finance could have done this on her own. It is highly unlikely that she was posting the journal entries for these fraudulent activities or reconciling the CC account. She had to have someone help her.

More than likely, she bullied her staff and forced them to help her carry out the fraud. Someone knew about this other than the VP, she had help. Unfortunately in instances like this, most employees don’t have a way to report this type of activity to the Board of Directors via a confidential incident reporting process.

By: Edith Orenstein

Edith Orenstein — Sun, 24 Jan 2010 02:22:18 +0000

@Independent Accountant (comment 6 & 14) makes significant point about substance vs. form of auditing standards.

By: Tracy Coenen

Tracy Coenen — Sun, 24 Jan 2010 01:04:51 +0000

David – Audits are awful at finding fraud. It’s either because audits are not designed to detect fraud or the auditors are idiots. Which do you choose? Audits still are designed to detect material misstatements from errors. They are not designed to detect them from irregularities. I’d be more than happy if auditors changed their work to have a better chance of finding fraud. But that’s not where we are today. To continue to lie to ourselves and say that audits are designed to detect fraud is silly. It accomplishes nothing. We have to stop pretending and start admitting that audits aren’t useful tools.

By: Independent Accountant

Independent Accountant — Sat, 23 Jan 2010 20:58:16 +0000

David:
I don’t care how SS attempted to conceal her fraud. I assign a 99.9% probability I would have caught it, THE WAY I AUDIT, no later than 2006. Possibly in 2005. I’m serious. I know what I am doing. Had the Arthur Andersen (AA) I remember of the late 1970s, done a “TFA” audit, it would have found the fraud. In all likelihood in 2005.
Let’s not go overboard. Assume “1978’s AA” had taken a 250-item sample of cash disbursements and selected it using “dollar-unit” sampling, that’s one item for every 0.4% of disbursements. With 5.4% of the 2005 dollars supposedly fraudulent, that’s 13 sample items which should have been questioned by 1978’s AA (5.4% / 0.4% = 13). What did the CPAs look at for from 2005-2009? How may sample items did they draw? From what? As Casey Stengel said when he managed the NY Mets in about 1962 after the NY Yankees, “Can anybody here play this game”? Do PWC or GT know how to audit anymore? Does anyone?

Richard Archer:
SAS 39 was adopted to require CPAs sample small items, not just look at items “above scope”. In my opinion, SAS 39 and its progeny and SAS 47 and its progeny are two of the most poorly understood SASs. This fraud should have been caught. Even if SS debited her Amex charges to purchases, the supporting documentation should have revealed that inventory items were not being bought for Koss use. Where were the receiving reports to support the disbursements?
I agree, a Coopers & Lybrand “flux review” should have turned this up.
Koss may be the most poorly performed audit since Coopers & Lybrand’s 1992 Phar-Mor fiasco.