Grant Thornton is having a helluva time keeping audit clients happy. After getting axed by Overstock.com in November, GT has now been fired by headphone maker Koss after it was discovered — by AMEX — that the company’s former VP of Finance had been embezzling millions of dollars since 2005.
In an 8-K filed yesterday, the Company stated that its financial statements from the past three years should not be relied on:
The Company has now concluded that its previously issued financial statements on Forms 10-K for the fiscal years ended June 30, 2005 through 2009 and on Form 10-Q for the three months ended September 30, 2009 should no longer be relied upon due to the unauthorized financial transactions.
A couple of commenters were debating this particular SNAFU over the Holiday break and while GT may not be responsible for discovering embezzlement, this is a perfect example of why small companies should not be exempt from Sarbanes-Oxley. As Guest 2 notes:
it looks like Koss will become the poster child for internal controls. The company clearly had to have deficient internal controls if the VP of Finance could use millions of dollars in company funds to pay her personal credit cards. We’re talking over $400,000 a month on average (if the $20 million figure is accurate) and that amount is clearly material to the company (i.e. that amount should not have gone unnoticed). My guess is that this will force all other small public companies to become full-pledged into 404 like the majority of public companies are.
We’d love to agree with Guest 2 but the simple fact of the matter is that Congress doesn’t give a rat’s ass about small companies complying with SOx. Most of the members have never even heard of Koss, especially since the company has a budget of around $0 for campaign contributions. Right now the only thing keeping the small company exemption at bay is the inability of Congress to move on financial regulatory reform, which is kinda sorta needed.
Headphone maker Koss fires auditor after firing VP [Reuters]
I feel their pain.
A $31 million fraud over 4 years on a $28 million balance sheet! And GT claims they aren’t responsible because they didn’t do an internal controls audit?!?!? Did they even do an audit??????
According to news articles, confronted by FBI agents at her home before Christmas, the former VP of Finance acknowledged she had bought clothing, jewelry and other personal items with money she diverted from Koss Corp. She said she carried out the scheme on her own, directing her assistant to make the fraudulent wire transfers. Sachdeva said she concealed the transfers by falsifying the balance in Koss’ bank account. If this is true, shouldn’t GT have figured this out??? Don’t they do bank confirms? Anyone?
It appears the embezzlement is over $31 million. They have gross sales of $38 million….this is greater than Enron if you think about the proportion of size of company. Yikes!
This could be whole topic itself if any more regulatory comments will come out….Congress or the SEC – while they may not care about smaller companies and you are right they haven’t heard of Koss, they probably will force smaller companies to comply with 404. It really doesn’t take too much time to vote “Yes – Make it happen” – they will show they care and they don’t care it’s a burden for businesses.
This case will not be the catalyst for SOX to be foisted upon smaller companies. It is that simple.
GT blew it on this one because as previous commenter noted a bank confirm would have identified this immediately. Instead GT, like the dopes most auditors are, believed whatever this VP handed them and didn’t seek out a second source to verify the information. Don’t even bother getting started if GT did any SAS99 work – obviously not. GT is going to get sued by Koss for negligence and malpractice, the compliant is probably still being drafted.
However, all this is hot air and is not going to lead to some kind of reform – it will be viewed as isolated and not systemic.
Lastly, how does a VP spend $28 million on personal items and jewelry and that not go noticed by coworkers? That is an asston of money we are talking about YOY…there has to be assets secreted elsewhere otherwise those are some insane shopping sprees. Nothing surprises anymore…
I gues this means there won’t be a thaw in the pay freeze at GT.
Grant has claimed no wrong doing. Innocent until proven guilty.
Too bad for them – I heard they have a nice base and even have picked up some recent manufacturing clients to add to their portfolio. I’m sure all of them are now thinking if it is a good idea even if Grant did everything by the book.
Innocent until proven guilty is a basis in criminal law – this is a civil matter with regards to GT’s liability and negligence in failing to detect the fraud. Therefore, that statement is irrelevant.
@7! I agree. In this world it is guilty till proven innocent. This will probably lead to a mas exodus of clients at GT. If the media picks up on this (Prime Time)it could be the end of GT, much like Arthur Anderson. Think about it. If you are a looking for an audit firm why on earth would you pick GT now, when it appears that there work sucks and can’t be relied upon. What company will want to take that risk on of re-stating financials. At a minimum GT will be buying work for years to come.
Grant Thornton has fired back that it was never hired to evaluate “internal controls” at Koss. Apparently the fact that the person falsified bank statements is an internal control matter and not something that should have been independently verified from the bank. Appears Jefferson Wells has worked through the holidays at a nice price and I’m sure some other firms are interested in picking up the restatement work. Once in a lifetime work.
What I don’t understand is that Grant Thornton keeps firing back with their own darn press statements. Shouldn’t they be embarrassed? Like tails between their legs embarrassed? I was willing to deal with the fact that Byrne-sy should be embarrassed, especially because it was a review, not an audit- Grant Thornton kind of keeps the right to disagree and change their opinion. Kind of. But what the heck is this? You can’t not (or you must— for you damn grammar freaks out there) catch a fraud like this in an audit. You just can’t.
@8
Why the hell would clients leave GT? It’s not like any of the B4 don’t have their own problems. The only good thing about this is it’s refreshing to see a non B4 be embarrassed. Now we can be sure all the firms do the same shoddy audit work.
@10, if this level of fraud with that much exposure to the company and significant materiality to the financial statements is not identified during an audit, then what good is an audit?
How does an audit provide any value to a company and its shareholders/investors/stakeholders (don’t forget about the lenders to this company)if it fails to identify something such as this? Checking the box on w/ps is not doing a damn thing. Wake and smell the coffee and put down the kool-aid. You turd.
I agree with #12 — I can definitely see banks/shareholders/stakeholders deciding that a reduced fee from Grant for the audit is not the way to go. Does anyone know if this is the Milwaukee or Chicago office – both are mentioned, depending on the article I read. I really do wonder if companies in Chicago (or Milwaukee if that is the case) will be leaving GT – you have to think that it will at least be thought about. Someone also told me that this partner at GT (Melissa something) was on the board with the VP-Finance at Koss in some charity organization in Chicago or Milwaukee – I wonder if that is the case.
This is a fascinating fact pattern. I can see that it will become a case study — what could or should have management, the board, and the auditors have been doing. $31 million gone which is more than their total assets and almost as much as their annual gross sales. I think we don’t have all of the facts yet. I find it hard to believe that if the bank statements were altered as the VP-Finance admitted and Grant dropped the ball on getting it independently verified that Grant would actually be shooting back an argument about internal controls. Sounds fishy – something off balance sheet or something was going on. Nevertheless the 9/30/10 financials were signed off by Grant and clearly Amex found personal payments in that period which hit the cash account and the balances appear to have been altered.
I am willing to bet that the fact pattern of the fraud has been misinterpreted by those reporting in the media. The audit team most likely confirmed with the bank the cash balances at year-end. My guess is that the monthly bank recs and support were altered (i.e., when the auditors asked to see support for wire transfers during the search or through other substantive testing procedures, they probably were presented with falsified invoices that reflected ordinary course of business expenses paid for through an AMEX business card). Additionally, if this is indeed a case of collusion as the reports are indicating, it would be very difficult for an audit team to uncover as it would seem on the surface that there are proper segregation of duties and other controls in place to mitigate risk of fraud.
@14 – I would agree if the fraud were a small percentage of the total balance sheet or income statement, but there is no excuse for missing $31 million of fraud on a $28 million balance sheet!
According to Koss’ proxy statement, Koss paid GT $151k and $71k for audit and audit related fees for years ended 6/30 2009 and 2008, respectively. This includes 3 Q’s and a K each year. It’s quite apparent that they didn’t throw that much time or talent at this audit.
@11, 10 here. I do think that Grant Thornton should have caught this… that was my whole grammar mention… but I’ll make it easier to read:
You must catch a fraud like this in an audit. You must.
Sorry, that was meant to be @12 not @11… either way. Yeah. GT. wow.
This is what is a fact: Sachdeva acknowledged she had bought clothing, jewelry and other personal items with money she diverted from Koss Corp. She said she carried out the scheme on her own, directing her assistant to make the fraudulent wire transfers. Sachdeva said she concealed the transfers by falsifying the balance in Koss’ bank account. Right there the VP-Finance has admitted she falsified cash balances. The point is should audit have caught fraud involving cash balances. Grant says audit can’t detect fraud. The public is questioning if any audit took place.
It appears that this VP-Finance, Sue Sachdeva of the Koss Corporation and Melissa Koeppel, audit partner of Grant Thornton LLP co-chair several auctions and events for the Big Brothers/Big Sisters. While it’s perfectly acceptable to be in a joint venture regarding a charity like they were, it may cause some questions if they were friends and truly independent.
I believe all of this will blow over and have no impact to GT (other than clients in the area to speculate if they should change). I predict Koss will have a new auditor by the end of the month. It appears Grant has done the audit since 2004 and before that they had a Big 4 firm. Since they probably switched over fees, logic says a regional firm will take them — whether that is BDO, Crowe, Baker Tilly, Clifton, McGladrey it remains to be seen. I’m sure KPMG would take them. Of course, maybe I’m wrong and they will shell out bigger money to a Big 4 on the restatment, but that’s my opinion.
Can we get some comments posted from someone who works in the office that did this?
What is the mood there? Has the OMP said anything? What about the staff and senior that worked on this engagement? Are they still employed? We need details!!!
Based on a previous comment, I agree that it is quite possible that Grant did not deliver high quality on the audit. I see they have a June 30th fiscal year end. This means the staff had to be working in July and August at year-end when they are not normally busy. So perhaps the best were not utilized on this audit. Furthermore, it’s a client with $38 million in sales. I understand it’s a public client – but quite possible that the “A” team would be used for much larger clients with higher fee structures….that is speculation. I do not work at Grant nor do I know anyone that does in that office.
To the previous commenter – according to the website below, Baker Tilly Virchow Krause is the new auditor. Good luck to them.
http://www.jsonline.com/business/80855147.html
Melissa Koeppel is the OMP. Don’t know for how much longer though.
Hey! I just realized that my new headphones were from Koss. I find them to be completely adequate. I hope that this isn’t a death blow.
No way GT isn’t liable somehow. Who cares if the cash balances were verified through confirms, there’s just no way that they paid careful attention to the reconciliations and outstanding items. When you see a 20 million dollar wire transfer (for the artwork), isn’t that material? Where is the invoice to support it? How could be duped on a 20 million dollar transaction for that small of a company?
This is why our parents don’t understand our jobs or why no one outside of the industry understands what value auditors actually add. Audits aren’t designed to detect fraud, but if you can’t figure this one out, what’s the point of an audit at all?
Apparently the VP-Finance’s husband is vice president for quality and outcomes at Children’s Hospital of Wisconsin. He also holds a law degree. Perhaps they should be checking over the hospital’s budgets now to see if this was a family affair. Of course, apparently if she is hiding clothes in a rented warehouse and in her office at work, she was probably hiding her addiction and embezzlement from him and he is the one to be sorry for.
If anyone knows, we heard today that the lady at Koss was selling designer clothes to Koss employees with the tag on them originally for hundreds of dollars for as little as $10 per item. And yet no one knew anything!
Did any GT employees purchase any of the “merchandise?”
I will say that I don’t work for GT but I’ve reviewed their workpapers and they fucking suck! They barely test controls, no journal entry testwork, and the work that they do manage to complete is subpar at best.
As many have already said, bank confirmations…one of the easiest procedures that we perform, would’ve caught this. If you aren’t confirming cash, what the hell ARE you doing over cash? Unfuckingbelievable.
Obvoiusly each office at any firm is different. However, something like this that happened in the Milwaukee/Chicago area is not good. It’s downright embarassing. Heads should roll.
Also, someone told me that Wisconsin is a community property state. If that is the case, not only could the VP-Finance land in prision, but in theory, so could the husband!
sorry, tax person here that only does provisions for partnerships … i thought SOX and the internal control rule was a requirement for audits of all public companies. Koss is SEC registered and traded publicly and all that good stuff, so why doesn’t SOX apply??