Koss Suit Blasts Ex-Auditor, Bares New Details in Fraud Case
Previously undisclosed details about allegations that an ex-Koss Corp. executive embezzled $31.4 million from her company over more than five years (CED Feb 2 p1) are contained in a new Koss lawsuit in which the company seeks to pin the blame on its former auditing firm for failing to uncover the illegal activity.
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The auditing firm, Chicago-based Grant Thornton, “recklessly disregarded, negligently failed to apprehend, and/or failed to disclose numerous accounting irregularities at Koss,” says the complaint, filed Thursday in Cook County, Ill., Circuit Court. Also named as a defendant in the complaint is the alleged embezzler, former Koss Vice President of Finance Sujata (Sue) Sachdeva. Sachdeva remains free on $50,000 bond awaiting trial for wire fraud and other criminal charges in U.S. District Court in Milwaukee. She has pleaded not guilty. Grant Thornton, which Koss terminated as its independent auditor Dec. 31, soon after the allegations surfaced against Sachdeva, stands by its record of service to Koss, spokesman John Vita told us in an e-mail Friday. “We remain confident that we have met all of our professional obligations and that our work complied with professional standards,” Vita said.
The criminal indictment against Sachdeva in January listed some articles of clothing, jewelry, even a time share in a Hawaii condo development, that she’s alleged to have bought with money pilfered from Koss bank accounts in Milwaukee and Chicago. The complaint against Grant Thornton depicts in far greater detail a scheme that Koss alleges began in July 2003 when Sachdeva wrote a $4,000 standard check for her own use payable to “petty cash,” and escalated to larger amounts drawn on Park Bank cashier’s checks that she used for paying her personal American Express bills. To cover her tracks, the complaint alleges, Sachdeva had Park Bank issue cashier’s checks “made out in a manner that identified payees by initials only.” For example, it says, “N.M. Inc.,” stood for Nieman Marcus, and “S.F.A.” for Saks Fifth Avenue. Grant Thornton should have but failed to discover the fraud “by inspecting the reverse side of the Park Bank cashier’s checks, which bore the full name of the payee endorsing the cashier’s check,” it says. In all, Sachdeva used about 300 Park Bank cashier’s checks drawn on Koss accounts to pay her personal bills, it says.
The Grant Thornton complaint also details Sachdeva’s alleged “improper use” of Koss company American Express traveler’s checks. Koss distributed the traveler’s checks to employees “for use in connection with company business, including business travel, conventions, meetings and trade shows,” the complaint says. Grant Thornton knew that Koss employees were required “to properly account for their use of traveler’s checks provided by the Company,” it says. Yet for five years, Sachdeva “improperly used the traveler’s checks to pay for personal expenses” to the tune of $400,000, all without properly accounting for them and without being detected by Grant Thornton, it says. “Had Grant Thornton properly conducted its audits and reviews beginning in fiscal year 2004, Koss would not have sustained all or nearly all of the approximately $400,000 in financial losses and damages related to Sachdeva’s improper use of the Company’s traveler’s checks,” it says.
The Koss lawsuit against Grant Thornton is the second complaint that the company has filed seeking to recover some of the $31.4 million lost through the embezzlement. Earlier this year, it filed a complaint accusing American Express of aiding and abetting Sachdeva’s fraud by doing “little to no investigation into the improper transactions” (CED May 11 p7).
The allegations against Sachdeva came to light just before Christmas, when AmEx investigators alerted Koss that the balances on Sachdeva’s personal credit-card accounts were being paid down through “numerous large wire transfers” from Koss bank accounts in Chicago and Milwaukee, the FBI said in a criminal complaint against Sachdeva filed in December.
AmEx has moved to have the Koss complaint dismissed, saying Koss, “a publicly traded company with internal accounting controls and outside auditors, incredibly never discovered this massive fraud on its own.” If not for AmEx, “Sachdeva’s fraud might have continued indefinitely,” it told the court. “But instead of thanking American Express for helping to end Sachdeva’s criminal activity, Koss filed this lawsuit.” The Koss complaint against Grant Thornton says the company discovered Sachdeva’s alleged transactions on or about Dec. 18, but doesn’t mention any role AmEx investigators may have played in uncovering the scheme.