Designing and refining an Entity-Relationship Model
A company wants a simple database to record information about ticket sale for
theatre performances. They describe the key elements of their requirements in the
following points:
• Customers have a name, phone number, a credit card no, and a unique customer
number.
• Customers can attend many performances, and each performance can have many
customers attending.
• Each performance of a show is on at a specific date and time, at a venue.
• Each performance has many actors and the actors in each performance can vary.
• Actors have a staff id, first name, last name, and a date of birth.
• A show has a title, year and duration in minutes. While two shows could have the same
title, no two shows in the same year have the same title.
• Shows can have many producers, each with a staff id, first name, last name, date of
birth.
Based on the information you gathered, model the activities in your client's business and present
your model as an Entity-Relationship (ER) diagram. Carefully state any assumptions that you
make. In your ER diagram, you must properly denote all applicable concepts, including weak or
strong entities, keys, composite or multi-valued attributes; relationships and their cardinality and
participation constraints.
After presenting your ER model to the management, they pointed out that your model lacks the
ability to capture all requirements of the operation. In particular, they pointed out the following
shortcomings:
1. Whenever customers want to attend a performance they must purchase a ticket, which
records the purchase date. They can use different credit cards for different purchases.
The customer account must be created prior to purchasing a ticket, and tickets are not
transferable.
2. Tickets are for a specific performance of a show and identify the seat number, and a
status (to indicate if the ticket has been redeemed).
3. There may be cases where performances of a show run concurrently.
4. Actors have a specific role that they play in each performance of the show which must be
recorded in the system.
5. Actors must have one understudy, who will perform their role in cases where the primary
actor is unavailable (eg due to illness). An understudy can study under many primary
actors.
6. Producers may have a single production company which has a unique name and has an
address. Each production company belongs to a single producer.
Draw a modified ER diagram to accommodate these additional requirements.
Note: Your answer to this question should include TWO complete ER diagrams

Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.

A negative answer should be indicated by a minus sign.

Problem: Project Evaluation

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3.5 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $4.3 million. In five years, the after-tax value of the land will be $6.4 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $30.93 million to build. The following market data on DEI’s securities is current:

DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 7 percent on new common stock issues, 5 percent on new preferred stock issues, and 3 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI’s tax rate is 40 percent. The project requires $1,050,000 in initial net working capital investment to get operational. Assume Wharton raises all equity for new projects externally.

a. Calculate the project’s initial Time 0 cash flow, taking into account all side effects. Assume that the net working capital will not require flotation costs.

b. The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +1 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project.

c. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $3.5 million. What is the after-tax salvage value of this plant and equipment?

d. The company will incur $5,800,000 in annual fixed costs. The plan is to manufacture 12,000 RDSs per year and sell them at $10,300 per machine; the variable production costs are $8,900 per RDS. What is the annual operating cash flow (OCF) from this project?

e. DEI’s comptroller is primarily interested in the impact of DEI’s investments on the bottom line of reported accounting statements. What will you tell her is the accounting break-even quantity of RDSs sold for this project?

f. Finally, DEI’s president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial officer; all he wants to know is what the RDS project’s internal rate of return (IRR) and net present value (NPV) are. Assume that the net working capital will not require flotation costs.

Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $3.6 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6.7 million on an aftertax basis. In five years, the aftertax value of the land will be $7.1 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $33.3 million to build. The following market data on DEI’s securities are current:

Debt:  
280,000 bonds with a coupon rate of 6.7 percent outstanding, 25 years to maturity, selling for 107 percent of par; the bonds have a $1,000 par value each and make semiannual payments.
      
Common stock:  
10,200,000 shares outstanding, selling for $75.20 per share; the beta is 1.15.
      
Preferred stock:  
500,000 shares of 4.5 percent preferred stock outstanding, selling for $84.75 per share. The par value is $100.
      
Market:  
6.7 percent expected market risk premium; 3.6 percent risk-free rate.

DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 7.5 percent on new common stock issues, 5 percent on new preferred stock issues, and 3 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI’s tax rate is 24 percent. The project requires $1,650,000 in initial net working capital investment to get operational. Assume DEI raises all equity for new projects externally and that the NWC does not require floatation costs..

a.Calculate the project’s initial Time 0 cash flow, taking into account all side effects. (A negative answer should be indicated by a minus sign.
b.The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +2.5 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project.
c.The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation to a zero salvage value. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $5.9 million. What is the aftertax salvage value of this plant and equipment?
d.The company will incur $8,200,000 in annual fixed costs. The plan is to manufacture 19,725 RDSs per year and sell them at $11,140 per machine; the variable production costs are $9,875 per RDS. What is the annual operating cash flow (OCF) from this project?
e.DEI’s comptroller is primarily interested in the impact of DEI’s investments on the bottom line of reported accounting statements. What will you tell her is the accounting break-even quantity of RDSs sold for this project?
Finally, DEI’s president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial officer; all he wants to know is what the RDS project’s internal rate of return (IRR) and net present value (NPV) are. (Do not round intermediate calculations. Enter your NPV in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89. Enter your IRR as a percent rounded to 2 decimal places, e.g., 32.16.)

a.   Cash flow     
b.   Discount rate      %
c.   Aftertax salvage value     
d.   Operating cash flow     
e.   Break-even quantity     
f.   IRR      %
NPV

Candy producer Jim’s Jellybeans have customers all over the world. To be able to meet demand, the company has been forced to operate 15 separate warehouses across the globe. Lately, however, development in IT and warehouse automation has created new possibilities for Jim’s Jellybeans. The cost of the current operation is (for the whole company):

Transportation: $1 000 000

Stock keeping: $15 000 000

Cost for tied-up capital: $2 000 000

The company is faced with three alternatives:

Alternative 1: Automate picking. This means that each warehouse will be 30% more expensive (stock keeping cost) due to new equipment etc. But it also means that the order to delivery lead-time for each warehouse will decrease by as much as 60%. The reduced lead time lets the company reduce the number of warehouses to 10. As a result of this, transportation cost will double.

Alternative 2: Automate everything. Here, the number of warehouses are reduced to 5. The remaining warehouses are heavily automated and stock keeping cost is increased by 70% for these. Transportation cost increases by 500%.

Alternative 3: Do nothing. Keep the current system intact.

Na. What is the cost for tied-up capital for alternative 1?

Nb. What is the cost for tied-up capital for alternative 2?$

Nc. What is the total cost for alternative 1?$

Nd. What is the total cost for alternative 2? $

Ne. What is the total cost for alternative 3?$

PopSolution Inc is a small IT Solution company based in Central Jakarta, Indonesia. They have just finished their sales pitch meeting with their latest potential client, an automobile sales company based in South Jakarta. The company was very satisfied with their portofolios, and asked them to provide a final quotation on the price that will be agreed upon. As for the project detail, the client asked for a simple web application with 3 main functions: (1) a homepage showing the company’s credibility and location, (2) a page to list all cars the company is selling, and (3) a Contact Us page where future customers can fill their data to further be contacted by the company’s representatives. Since the transaction is too substantial to be handled in the application, all purchase will be done outside of the web application. Every month, PopSolution spends 30.000.000 IDR for the overhead cost of all its employees. The organizational average productivity for the system of similar type is 25 FP/person-month. This means that with one person doing the job of 50 Function Point, it will take one month, with 2 persons doing the job, it will take half a month to finish. As the new member of the development team, you are asked to prove your expertise on software estimation by providing the team with Function Point Analysis (FPA) on your next internal meeting. Your tasks are:

Calculate the Unadjusted Function Point, Value Adjustment Factors, and the Function Point.

INTRODUCTION 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 CFO. The other Board members have served 25 years. Neither Michael nor the other Board members have financial backgrounds. Michael graduated college with an anthropology degree. Although Koss Corp. is a multimillion dollar company, it only employs 73 people, which auditors consider a “small business.” Michael has worked for Koss Corp. since 1976, and earns a base salary of $295,000; his total compensation, including options, is over $800,000. THE ACCOUNTING FUNCTION The accounting work was handled by Sujata “Sue” Sachdeva, vice president of finance, secretary, and principal accounting officer—in a small business, employees typically have more than one responsibility. Sue, whose family was from India, had been employed at the company for 17 years. She was a trusted and valued employee and earned about $200,000 per year. She had two assistants: Julie Mulvaney, senior accountant, and Tracy Malone, junior accountant. Sue told friends and coworkers that her family was very wealthy and held a very high social status in India. She reported that she and her husband spent their wedding night in the Taj Mahal. It was important for her and her family to live in the best area, attend the best schools, and socialize with the recognized society members of Milwaukee. Sue served on several charity boards, organized lavish parties for their events that cost millions of dollars, and purchased all items that did not sell at the charity auctions she organized. Sue also had a reputation as a demanding boss: Her assistants were required to help her with the charity events, and Sue took them out to lunch almost daily. Julie and Tracy also went to Sue’s house to help her unpack and store the many expensive items she purchased. Sue loved designer clothing, shoes, and accessories and purchased over 20,000 items in a five-year period from 2004 to 2009. She purchased so many items that they did not fit in her house. So, she rented a storage unit and a two-office suite to store her unused purchases. In addition, Sue made some purchases that she never picked up from the retailers. Sue could not pay for all of these purchases with her $200,000 salary or her physician husband’s $600,000 salary. Her job at Koss Corp. provided her with an extra opportunity to obtain the funds necessary to support her lavish lifestyle: She committed the fraud over at least a five-year period to fulfill her compulsive shopping disorder. 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. Sue embezzled $34 million over a five-year period beginning in 2004; only the embezzled amounts from 2005 forward were documented, even though she had been allegedly embezzling since 1997. The fraud was uncovered when American Express notified Michael Koss about an unusual, ongoing practice: Sue paid her personal credit card balances with several large wire transfers from a Koss Corp. bank account. The following amounts represent the fund’s embezzled by Sue: 2005 - $2,195,477 2006 - $2,227,669 2007 - $3,160,310 2008 - $5,040,968 2009 - $8,498,434 2010 - $10,286,988 (two quarters) Sue wired an average of $500,000 per month from Koss Corp. bank accounts to pay for her personal credit card bills. Sue colluded with her senior accountant Julie to embezzle the money. Julie maintained she just made the journal entries and cash transfers based on Sue’s orders, noting that Sue was a “powerful, imperious, overbearing, determined, and willful superior.” FRAUDULENT ACTIVITIES Koss Corp., like most businesses, had a system of internal controls designed to protect the company’s assets. The fraudulent activities that occurred included large payments by check or wire transfer, misuse of petty cash, an outdated computerized accounting system, unprepared account reconciliations, and minimal management review of financial statements. PAYMENTS BY CHECK OR WIRE TRANSFER Michael approved invoices of $5,000 or more for payment. 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. Over the total 12-year embezzlement period, Sue wrote over 500 cashier’s checks, totaling over $17.5 million, from Park Bank. 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. 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. 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. PETTY CASH Most organizations maintain a petty cash fund to facilitate small, incidental expenses. Petty cash balances and transactions are usually small. Given the insignificance of petty cash, management and auditors spend very little time reviewing these accounts. Sue used petty cash as another vehicle to obtain funds: more than $145,000 over five years. COMPUTERIZED ACCOUNTING SYSTEM A computerized accounting system and the related software were designed to prevent certain unintentional (or intentional) errors. For example, entering an out of balance entry is not possible in most computerized accounting systems. Koss Corp.’s computerized accounting system, however, was almost 30 years old and did not have sufficient controls. Koss Corp.’s accounting system could not lock out changes made after the end of the month, and there was no audit trail. Sue and Julie made undetected post- closing changes to the accounting records without Michael’s approval or knowledge. Julie covered up Sue’s embezzlement by forging entries to match the company cash account balance with the cash on hand balance in the bank and “holding back” receivables to match the amount of the cash shortfall. In addition, Julie did not record Internet sales or sales from the company’s retail outlet in order to cover up the cash shortfall. RECONCILIATIONS Other checks and balances in accounting systems include account reconciliations that are prepared by the accounting staff. Account reconciliations were not prepared or maintained at Koss Corp. Reconciliations that were performed were prepared by Sue or Julie, so they were not correct; they also initiated or recorded all accounting entries. MANAGEMENT REVIEW Sue provided Michael with financial statements and reports that were prepared from the fraudulent accounting records, and Michael did not review them in great detail. Because he trusted Sue, Michael did not fully review the financials before approving them. THE AUDITORS Grant Thornton, a national firm based in the U.S., was the auditor for Koss Corp. at the time. Over the five-year period, Koss Corp. paid Grant Thornton $625,000 to audit their financial results. Grant Thornton classified Koss Corp. as a non-accelerated filer. The fraud was never detected during the audit for several reasons: (1) Grant Thornton reviews the company’s financials to make sure that every account balance aligns with accounting standards. Because Sue and Julie were balancing the books to counteract the fraud, nothing seemed suspicious. (2) Lax oversight ran rampant at Koss Corp. Because Michael trusted Sue, he believed all her numbers were correct. Sue knew the questions the auditors would ask and the documents they would review. Because Sue knew the July 1 year-end would bring scrutiny to June’s records, she never moved any money in June. Grant Thornton viewed Koss Corp. as a small audit of a well-run company with low risk and an excellent training ground for new auditors. CONCLUSION Sue embezzled over $34 million in a five-year span. She betrayed the trust of her boss, Michael, as well as the company’s employees and shareholders.

QUESTION:

Review the fraudulent activities. What went wrong?

Describe what internal controls were missing or

circumvented. Consider the Sarbanes-Oxley Act of 2002

(SOX) requirements, and review the definition of internal

controls. Who is responsible for internal controls? What

reporting is required?

INTRODUCTION 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 aCorp. 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 CFO. The other Board members have served 25 years. Neither Michael nor the other Board members have financial backgrounds. Michael graduated college with an anthropology degree. Although Koss Corp. is a multimillion dollar company, it only employs 73 people, which auditors consider a “small business.” Michael has worked for Koss Corp. since 1976, and earns a base salary of $295,000; his total compensation, including options, is over $800,000. THE ACCOUNTING FUNCTION The accounting work was handled by Sujata “Sue” Sachdeva, vice president of finance, secretary, and principal accounting officer—in a small business, employees typically have more than one responsibility. Sue, whose family was from India, had been employed at the company for 17 years. She was a trusted and valued employee and earned about $200,000 per year. She had two assistants: Julie Mulvaney, senior accountant, and Tracy Malone, junior accountant. Sue told friends and coworkers that her family was very wealthy and held a very high social status in India. She reported that she and her husband spent their wedding night in the Taj Mahal. It was important for her and her family to live in the best area, attend the best schools, and socialize with the recognized society members of Milwaukee. Sue served on several charity boards, organized lavish parties for their events that cost millions of dollars, and purchased all items that did not sell at the charity auctions she organized. Sue also had a reputation as a demanding boss: Her assistants were required to help her with the charity events, and Sue took them out to lunch almost daily. Julie and Tracy also went to Sue’s house to help her unpack and store the many expensive items she purchased. Sue loved designer clothing, shoes, and accessories and purchased over 20,000 items in a five-year period from 2004 to 2009. She purchased so many items that they did not fit in her house. So, she rented a storage unit and a two-office suite to store her unused purchases. In addition, Sue made some purchases that she never picked up from the retailers. Sue could not pay for all of these purchases with her $200,000 salary or her physician husband’s $600,000 salary. Her job at Koss Corp. provided her with an extra opportunity to obtain the funds necessary to support her lavish lifestyle: She committed the fraud over at least a five-year period to fulfill her compulsive shopping disorder. 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. Sue embezzled $34 million over a five-year period beginning in 2004; only the embezzled amounts from 2005 forward were documented, even though she had been allegedly embezzling since 1997. The fraud was uncovered when American Express notified Michael Koss about an unusual, ongoing practice: Sue paid her personal credit card balances with several large wire transfers from a Koss Corp. bank account. The following amounts represent the fund’s embezzled by Sue: 2005 - $2,195,477 2006 - $2,227,669 2007 - $3,160,310 2008 - $5,040,968 2009 - $8,498,434 2010 - $10,286,988 (two quarters) Sue wired an average of $500,000 per month from Koss Corp. bank accounts to pay for her personal credit card bills. Sue colluded with her senior accountant Julie to embezzle the money. Julie maintained she just made the journal entries and cash transfers based on Sue’s orders, noting that Sue was a “powerful, imperious, overbearing, determined, and willful superior.” FRAUDULENT ACTIVITIES Koss Corp., like most businesses, had a system of internal controls designed to protect the company’s assets. The fraudulent activities that occurred included large payments by check or wire transfer, misuse of petty cash, an outdated computerized accounting system, unprepared account reconciliations, and minimal management review of financial statements. PAYMENTS BY CHECK OR WIRE TRANSFER Michael approved invoices of $5,000 or more for payment. 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. Over the total 12-year embezzlement period, Sue wrote over 500 cashier’s checks, totaling over $17.5 million, from Park Bank. 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. 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. 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. PETTY CASH Most organizations maintain a petty cash fund to facilitate small, incidental expenses. Petty cash balances and transactions are usually small. Given the insignificance of petty cash, management and auditors spend very little time reviewing these accounts. Sue used petty cash as another vehicle to obtain funds: more than $145,000 over five years. COMPUTERIZED ACCOUNTING SYSTEM A computerized accounting system and the related software were designed to prevent certain unintentional (or intentional) errors. For example, entering an out of balance entry is not possible in most computerized accounting systems. Koss Corp.’s computerized accounting system, however, was almost 30 years old and did not have sufficient controls. Koss Corp.’s accounting system could not lock out changes made after the end of the month, and there was no audit trail. Sue and Julie made undetected post- closing changes to the accounting records without Michael’s approval or knowledge. Julie covered up Sue’s embezzlement by forging entries to match the company cash account balance with the cash on hand balance in the bank and “holding back” receivables to match the amount of the cash shortfall. In addition, Julie did not record Internet sales or sales from the company’s retail outlet in order to cover up the cash shortfall. RECONCILIATIONS Other checks and balances in accounting systems include account reconciliations that are prepared by the accounting staff. Account reconciliations were not prepared or maintained at Koss Corp. Reconciliations that were performed were prepared by Sue or Julie, so they were not correct; they also initiated or recorded all accounting entries. MANAGEMENT REVIEW Sue provided Michael with financial statements and reports that were prepared from the fraudulent accounting records, and Michael did not review them in great detail. Because he trusted Sue, Michael did not fully review the financials before approving them. THE AUDITORS Grant Thornton, a national firm based in the U.S., was the auditor for Koss Corp. at the time. Over the five-year period, Koss Corp. paid Grant Thornton $625,000 to audit their financial results. Grant Thornton classified Koss Corp. as a non-accelerated filer. The fraud was never detected during the audit for several reasons: (1) Grant Thornton reviews the company’s financials to make sure that every account balance aligns with accounting standards. Because Sue and Julie were balancing the books to counteract the fraud, nothing seemed suspicious. (2) Lax oversight ran rampant at Koss Corp. Because Michael trusted Sue, he believed all her numbers were correct. Sue knew the questions the auditors would ask and the documents they would review. Because Sue knew the July 1 year-end would bring scrutiny to June’s records, she never moved any money in June. Grant Thornton viewed Koss Corp. as a small audit of a well-run company with low risk and an excellent training ground for new auditors. CONCLUSION Sue embezzled over $34 million in a five-year span. She betrayed the trust of her boss, Michael, as well as the company’s employees and shareholders.

QUESTION:

What were the problems in the corporate governance

and/or organization structure? What are the major

requirements of SOX with respect to corporate

governance and/or organization structure? How would

corporate management and the accounting function be

better organized?

INTRODUCTION 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 CFO. The other Board members have served 25 years. Neither Michael nor the other Board members have financial backgrounds. Michael graduated college with an anthropology degree. Although Koss Corp. is a multimillion dollar company, it only employs 73 people, which auditors consider a “small business.” Michael has worked for Koss Corp. since 1976, and earns a base salary of $295,000; his total compensation, including options, is over $800,000. THE ACCOUNTING FUNCTION The accounting work was handled by Sujata “Sue” Sachdeva, vice president of finance, secretary, and principal accounting officer—in a small business, employees typically have more than one responsibility. Sue, whose family was from India, had been employed at the company for 17 years. She was a trusted and valued employee and earned about $200,000 per year. She had two assistants: Julie Mulvaney, senior accountant, and Tracy Malone, junior accountant. Sue told friends and coworkers that her family was very wealthy and held a very high social status in India. She reported that she and her husband spent their wedding night in the Taj Mahal. It was important for her and her family to live in the best area, attend the best schools, and socialize with the recognized society members of Milwaukee. Sue served on several charity boards, organized lavish parties for their events that cost millions of dollars, and purchased all items that did not sell at the charity auctions she organized. Sue also had a reputation as a demanding boss: Her assistants were required to help her with the charity events, and Sue took them out to lunch almost daily. Julie and Tracy also went to Sue’s house to help her unpack and store the many expensive items she purchased. Sue loved designer clothing, shoes, and accessories and purchased over 20,000 items in a five-year period from 2004 to 2009. She purchased so many items that they did not fit in her house. So, she rented a storage unit and a two-office suite to store her unused purchases. In addition, Sue made some purchases that she never picked up from the retailers. Sue could not pay for all of these purchases with her $200,000 salary or her physician husband’s $600,000 salary. Her job at Koss Corp. provided her with an extra opportunity to obtain the funds necessary to support her lavish lifestyle: She committed the fraud over at least a five-year period to fulfill her compulsive shopping disorder. 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. Sue embezzled $34 million over a five-year period beginning in 2004; only the embezzled amounts from 2005 forward were documented, even though she had been allegedly embezzling since 1997. The fraud was uncovered when American Express notified Michael Koss about an unusual, ongoing practice: Sue paid her personal credit card balances with several large wire transfers from a Koss Corp. bank account. The following amounts represent the fund’s embezzled by Sue: 2005 - $2,195,477 2006 - $2,227,669 2007 - $3,160,310 2008 - $5,040,968 2009 - $8,498,434 2010 - $10,286,988 (two quarters) Sue wired an average of $500,000 per month from Koss Corp. bank accounts to pay for her personal credit card bills. Sue colluded with her senior accountant Julie to embezzle the money. Julie maintained she just made the journal entries and cash transfers based on Sue’s orders, noting that Sue was a “powerful, imperious, overbearing, determined, and willful superior.” FRAUDULENT ACTIVITIES Koss Corp., like most businesses, had a system of internal controls designed to protect the company’s assets. The fraudulent activities that occurred included large payments by check or wire transfer, misuse of petty cash, an outdated computerized accounting system, unprepared account reconciliations, and minimal management review of financial statements. PAYMENTS BY CHECK OR WIRE TRANSFER Michael approved invoices of $5,000 or more for payment. 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. Over the total 12-year embezzlement period, Sue wrote over 500 cashier’s checks, totaling over $17.5 million, from Park Bank. 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. 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. 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. PETTY CASH Most organizations maintain a petty cash fund to facilitate small, incidental expenses. Petty cash balances and transactions are usually small. Given the insignificance of petty cash, management and auditors spend very little time reviewing these accounts. Sue used petty cash as another vehicle to obtain funds: more than $145,000 over five years. COMPUTERIZED ACCOUNTING SYSTEM A computerized accounting system and the related software were designed to prevent certain unintentional (or intentional) errors. For example, entering an out of balance entry is not possible in most computerized accounting systems. Koss Corp.’s computerized accounting system, however, was almost 30 years old and did not have sufficient controls. Koss Corp.’s accounting system could not lock out changes made after the end of the month, and there was no audit trail. Sue and Julie made undetected post- closing changes to the accounting records without Michael’s approval or knowledge. Julie covered up Sue’s embezzlement by forging entries to match the company cash account balance with the cash on hand balance in the bank and “holding back” receivables to match the amount of the cash shortfall. In addition, Julie did not record Internet sales or sales from the company’s retail outlet in order to cover up the cash shortfall. RECONCILIATIONS Other checks and balances in accounting systems include account reconciliations that are prepared by the accounting staff. Account reconciliations were not prepared or maintained at Koss Corp. Reconciliations that were performed were prepared by Sue or Julie, so they were not correct; they also initiated or recorded all accounting entries. MANAGEMENT REVIEW Sue provided Michael with financial statements and reports that were prepared from the fraudulent accounting records, and Michael did not review them in great detail. Because he trusted Sue, Michael did not fully review the financials before approving them. THE AUDITORS Grant Thornton, a national firm based in the U.S., was the auditor for Koss Corp. at the time. Over the five-year period, Koss Corp. paid Grant Thornton $625,000 to audit their financial results. Grant Thornton classified Koss Corp. as a non-accelerated filer. The fraud was never detected during the audit for several reasons: (1) Grant Thornton reviews the company’s financials to make sure that every account balance aligns with accounting standards. Because Sue and Julie were balancing the books to counteract the fraud, nothing seemed suspicious. (2) Lax oversight ran rampant at Koss Corp. Because Michael trusted Sue, he believed all her numbers were correct. Sue knew the questions the auditors would ask and the documents they would review. Because Sue knew the July 1 year-end would bring scrutiny to June’s records, she never moved any money in June. Grant Thornton viewed Koss Corp. as a small audit of a well-run company with low risk and an excellent training ground for new auditors. CONCLUSION Sue embezzled over $34 million in a five-year span. She betrayed the trust of her boss, Michael, as well as the company’s employees and shareholders.

QUESTION:

What were the responsibilities of the following entities or individuals for the fraudulent activities? What are the possible consequences?

a. American Express
b. Park Bank
c. Sue Sachdeva
d. Michael Koss
e. Julie Mulvaney

The data below were obtained in a study on the number of absences and the final grades (in percentages) of seven randomly selected students in a statistics class. Number of absences 6 2 15 9 12 5 8 Final grade 82 86 43 74 58 90 65 (2 4 6 8 10 12 14 5 0 6 0 7 0 8 0 9 0 absences g ra d e s) (this is just the scattered plot which i could not place here)

3 a) Consider the scatterplot of the data above and describe the association between the number of absences and the final grade. Is linear regression appropriate here?

b) Perform linear regression analysis in SPSS. Write down the linear regression equation that relates the final grades and the number of absences.

c) A 90% confidence interval for x = 10 is (58.996, 69.897). Interpret it.

d) Find a 95% confidence interval for the slope of the regression line.

e) Interpret the slope of the regression line.

f) Interpret the y-intercept of the regression line.

g) What assumptions do you need for performing the linear regression analysis in part b)?

The following data provides 3 ex scores and 1 final ex score. Using the data you are to create a multiple linear regression line to predict final ex scores.

#### a
What is the correct model for all three tests?

#### b
How accurate is the model and interpret the R^squared value.

#### c
Check the conditions for a linear regression.

#### d
Interpret the intercept and discuss its implications.

#### e
Interpret the EX3 esimate in context.

#### f
Right a results sentence reporting your findings