Asset Misappropriation and Corporate Governance
Assignment 4: Asset Misappropriation and Corporate Governance Due Week 10 and worth 320 points For this assignment, use the Internet or Strayer databases to research and identify an organization that was a victim of asset misappropriation. Write a five to six (5-6) page paper in which you: Based on your research, evaluate the type of asset misappropriations that occurred at the organization, and assess the factors that contributed to the misappropriation. Give your opinion on whether poor management or lack of management played a role in the asset misappropriation. Provide support for your rationale. Evaluate the legal mechanisms that could have been used to recover assets through the civil and criminal justice systems. Assess whether the civil and criminal justice systems did an effective job in recovering the organization’s assets. Provide support for your rationale. Assess management’s responsibility to share information related to the breach with various stakeholder groups, indicating what should be shared and how. Provide support for your rationale. Review AICPA Statements on Auditing Standard (SAS) No. 99, “ Risk Factors Relating to Misstatements Arising from Misappropriation of Assets”, found within the text. Assess SAS 99 risk factors and discuss if the risk factors were prevalent in the organization you researched. Give your opinion on whether or not organizations should implement a plan that reviews risk factors on a regular basis to determine if fraud has occurred. Explain why or why not. Review the corporate governance plan of the organization you researched, evaluate the effectiveness of the plan, and make suggestions for improvements to protect the stakeholders. Provide support for your rationale. Recommend a fraud prevention plan for this organization. Determine what positive or negative consequences this fraud prevention plan might have on employees’ morale and the public perception of the organization. Use at least four (4) quality resources in this assignment. Note: Wikipedia and similar Websites do not qualify as quality resources. Your assignment must follow these formatting requirements: Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions. Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length. The specific course learning outcomes associated with this assignment are: Examine the basic concepts related to fraud, including environment, impact, and the methodologies related to fraud examination. Analyze the theories related to crime causation, the essence of crime, organizational environment conducive to crime, and ethical issues related to fraud. Examine the human factors related to corruption and how understanding these factors can facilitate the fraud prevention and deterrence process. Use technology and information resources to research issues in forensic accounting. Write clearly and concisely about forensic accounting issues using proper writing mechanics.
ASSET MISAPPROPRIATION AND CORPORATE GOVERNANCE: KOSS CORPORATION.
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Introduction
Evidently, asset misappropriation in corporations is not a new phenomenon as cases of fraud by senior company employees have been prevalent since 20th century. Schemes involving asset misappropriation include frauds where perpetrators employ deceit or trickery to misuse or steal corporation’s resources. In this scenario, organization’s assets are taken to benefit the individuals engaged in the frauds. Typically, individual engaged in assets misappropriation (which is a crime) are organizational employees, vendors or customers but, over 90% of cases reported were committed by employees. Asset misappropriation is characterized by taking organizational resources through deceit or trickery rather than force. Furthermore, concealment, conversion and asset theft “acts” must be present (Institute of Management Accountants, 2009).
Asset misappropriation falls into two categories namely; theft of non-cash assets and theft of cash. Apparently, asset misappropriation occurs under different circumstances which range from: skimming (where fraud occur before recording in books), misuse of inventory, equipment, cash and supplies and during procurement process. Recent research by ACFE (Association of Certified Fraud Examiners) shows that the form of asset misappropriation involving cash embezzlement and fraudulent procurement (paying for purchases at over-estimated prices) are the most common and they cost U.S companies millions of dollars (Rittenberg, Johnstone&Gramling, 2012).
This research paper seeks to analyze the issue of asset misappropriation and corporate governance in Koss Corporation by drawing from the case of Sujata “Sue” Sachdeva (CFO) embezzlement in 2009. The paper will evaluate the nature of asset misappropriation in Koss Corporation, examine factors that contributed to the issue and legal mechanisms followed or ought to have been followed. The paper will also review the company’s corporate governance plan and recommend an effective fraud prevention plan for Koss Corporation.
Evaluation of Asset Misappropriation in Koss Corporation.
Koss Corporation is an American public trading company that manufactures headphone. It was founded in 1953 and it is headquartered in Milwaukee, WI. Koss Corporation has entered the U.S history books for companies ranked in top ten cash embezzlement problems. Sujata “Sue”Sachdeva had served in the company as VP Finance, Principal Accounting Officer and Secretary. In 2009, Koss Corporation discovered a fraudulent scheme where Sujata “Sue”Sachdeva(CFO) had embezzled cash for 12 years (from 1997-2009). The type of asset misappropriation that she had been involved in was fraudulent fund transfer. The CFO had been involved in fraudulent wire funds transfers. She had authorized the transfers from Koss bank accounts to foot the American Express credit card bills. She had also issued many cashier’s checks which paid for her personal expenses. Furthermore, Sachdeva had instructed the subordinate employees to make wrong accounting entries in order to conceal her frauds. The total amount that the CFO had stolen was estimated at $40.9 millions which she also used to purchase a lavish home in Mequon, expensive cars, ownership interest in an Ocean Resort, luxury travel and items. After an internal investigation, Sachdeva was arrested in 2009 and charged with numerous counts of frauds (Journal Sentinel).
Factors Contributing to the Misappropriation.
An in-depth analysis of Koss Corporation asset misappropriation case by Sachdeva reveals various factors that contributed towards the fraudulent fund transfer scheme. Majorly, Koss Corporation internal control takes the biggest blame. Surprisingly, the company had received unqualified opinion from its auditor for the year ending June 2008 and 2009. However, in accordance to SOC, the engaged auditor was not supposed to engage in matters of the company’s IS over financial reporting(Journal Sentinel). First, the accounting system used in Koss Corporation was not effective as it was old. It is alleged that the CEO, Michael J. Koss (MJK) had turned down proposals to purchase an effective accounting system. As a result, access in the system that was used could not be locked during end month. This facilitated lack of audit trail. Consequently, this made it easier for Sechdeva (CFO) and her Senior Accountant (Mulvaney) to make false journal entries/undetected post-closing changes in the system an act that violated internal control because the CEO was bypassed in authorizing those changes. Further, the CEO did not have IT policies, especially, those concerning security and controls. Password to access accounting computers were not changed regularly neither was accounting terminals locked when not being used. This made it difficult to monitor network and innumerous security violations. The accounting department of Koss Corporation had very few accounting staff at the time of the fraud. Critical duties were only performed by few employees. This increased chances of fraud and concealment by the CFO and her senior accountant. The internal control used at Koss vested too much authority to the CFO as she was only required to seek invoice approval if the amount exceeded $ 5000. Fraud examiner analysts argues that such unmonitored authority contributed to the fraud. In this scenario, poor management by the CEO as well an ineffective ICS contributed to the embezzlement (Journal Sentinel)
Legal Mechanisms Followed.
The CFO was indicted and charged with six counts of fraudulent wire transfer that resulted to an embezzlement of $ 34 millions from the company. In a typical scenario, a company that investigates its employees and suspects them to have embezzled cash has an ultimate legal mechanism that is provided by the justice system. In fact, the company should immediately file criminal charges to the alleged employees. The aim is to recover the alleged stolen assets either in form of liquid c...