Question

Assume the role of an expert witness who has been asked by a court of law to assess whether and to what extent Koss management and Grant Thornton were responsible for failing to prevent or detect the embezzlement and accounting fraud.Write a two-page professional opinion summarizing what you believe went wrong, and whether and how Koss management and Grant Thornton failed in their responsibilities. Cite specific examples to support your conclusion. Conclude your report with an assessment of whether Koss management and Grant Thornton should be held at least partly responsible for failing to prevent or detect the fraud.

Answer 1

It appears that the fraud may have continued for a longer period. Amex became suspicious that Sachdeva’s personal bills were being settled from the KOSS corporate account and contacted Michael Koss, CEO. This leads to the fraud being uncovered. After it came to notice of Michael, it was reported to SEC and further investigations were started.
The role of auditors was to do careful audit, follow all PCAOB auditing standards and express their opinion based on the evidence and audit procedures. It seems they may have failed to do so. GT always issued an unqualified opinion on financial statements to KOSS.Initially, GT refused to accept the blame for negligence and claimed that preparation and fair presentation of financial statements as well as designing the internal controls are the responsibility of management. Further, they claimed that they were not assigned for ICFR audit. Because of its size, KOSS hasn’t been required to have its outside auditor assess the effectiveness of the company’s internal controls over its financial reporting. But later on, they admitted their mistakes and negligence and settle compensation worth $ 8.5 million. Based upon an analysis of what happened the fact that the fraud was not detected until a substantial amount had been misappropriated was clearly due to senior management not discharging their duties properly.As much as it would be desirable (and in some cases expected) for audits to uncover fraud (and it is often assumed that audits are designed to do this), audits are not designed to uncover fraud. Financial statement audits rarely detect fraud because detecting fraud is not the purpose of a financial statement audit. If companies need to engage someone to detect fraud, then they need to hire forensic accountants specifically to perform tests aimed at detecting and preventing fraud. They simply can’t rely on the auditors. Some parties are of the opinion that auditors should change their work in order to detect more fraud. But as
mentioned earlier, this is not the purpose of a financial statement audit. Auditors are engaged to audit and express a professional and independent opinion on financial statements. They are not engaged to detect fraud. The responsibility to detect fraud lies with the companies and their management, and if management wishes to detect fraud, they need to take measures over and above the standard financial statement audit.