ISSN 1940-204X

Koss Corporation
Corporate Governance, Internal Controls, and Ethics:
What Went Wrong?
Melanie O. Anderson
Slippery Rock University
INTRODUCTION

THE ACCOUNTING FUNCTION

Koss Corporation is a Milwaukee company whose principal business is the design, manufacture, and sale of stereo headphones and related accessories. Michael Koss is the
CEO; his father, John Koss, founded the company in 1958.
The company has trademarks and patents for its products to differentiate itself from the competition. Koss Corp. has a six-man Board of Directors, including Michael and his father. John is 81 years old and serves as chairman of the
Board. Michael is 57 years old and serves as vice chairman, president, CEO, COO, and …show more content…

Yet processing wire transfers and cashier’s checks outside of the accounts payable system did not require his approval.
This flaw in Koss Corp.’s internal control system allowed Sue and Julie to cover up the embezzlement.16
Over the total 12-year embezzlement period, Sue wrote over 500 cashier’s checks, totaling over $17.5 million, from
Park Bank.17 Julie did not have the authority to sign checks at Park Bank, although she often ordered and processed the checks for Sue without Michael’s knowledge or authorization.18 So as not to draw attention to these checks, they were often made payable to initials, such as “N-M,” for
Neiman Marcus or “S.F.A.” for Saks Fifth Avenue.19
Julie helped Sue initiate and authorize wire transfers of
Koss Corp. funds to Sue’s personal creditors for over $16.3 million without requiring or obtaining Michael’s approval.20

THE FRAUD
Sue started stealing from the company with relatively small thefts that increased over the years. She partially hid the alleged theft in cost of goods sold (COGS) and indicated the increase in COGS was due to rising material costs. She also overstated assets and other expenses and understated liabilities and sales.10
Sue embezzled $34 million over a five-year period beginning in 2004;11 only the embezzled amounts from