Headphone maker Koss has fired a vice-president of finance who allegedly took US$20 million from company coffers to make purchases of expensive clothing, jewellery, and other items for personal use.

In a criminal complaint filed by the US Attorney’s Office in Wisconsin, Sujata “Sue” Sachdeva, who held the position since 1992, has admitted she used her position at the company to authorise company funds to pay her credit card bills. She then falsified Koss’s bank account records to hide the act, according to a report by news agency Reuters.

Between January 2008 and December 2009 alone, Ms Sachdeva allegedly accumulated a credit card bill of more than US$4.5 million. Bills often amounted to hundreds of thousands of dollars. They included nearly US$1.4 million at a high end fashion retailer in Wisconsin called Valentina Boutique, US$670,000 at women’s clothing store Au Courant in Milwaukee, US$649,000 at Zita Bridal Salon in Wisconsin, and US$255,000 at Karat 22 Jewellers in Texas.

Preliminary estimates have put the amount of unauthorised transactions since 2006 at more than US$20 million, according to the criminal complaint. The company, which posted first quarter sales of US$10.8 million, has said that as a result its financial statements since the end of its 2006 fiscal year will need to be restated. It has also placed two members of its accounting staff, who reported to Sachdeva, on unpaid administrative leave, the report said.

The unauthorised transactions was first spotted by American Express, with which Sachdeva paid her purchases with, when they noticed that her personal credit bills were being settled by large cash payments from Koss’s corporate bank accounts.

They notified Koss’s chief executive, Michal Koss, who began an internal investigation, and found boxes of women’s clothing in Sachdeva’s office, some with price tags still attached. They also found credit card statements in Sachdeva’s name.

Koss told the news agency that it is continuing its internal investigation of the matter, as well as efforts to recover the merchandise purchased using company funds. Sachdeva’s lawyer, Michael Hart, has declined to comment.

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Top finance executives, such as chief financial officers (CFO) and chief accounting officers (CAO), represented 44 per cent of the total number of individuals which were charged by the US Securities and Exchange Commission (SEC) in 2008 with committing financial statement fraud, according to a recent survey.

This was the result of the third annual study of SEC Accounting and Auditing Enforcement Releases, conducted by the Deloitte Forensic Center. Apart from CFOs and CAOs, it also found that both corporate chief executive officers and other members of senior management, each represented 24 per cent of allegations, while directors and general counsel both represented four per cent of the executives cited.

Meanwhile, the survey also found that revenue recognition fraud, once the most prevalent form of financial statement fraud, has been in steady decline since the beginning of the decade. The category represented 30 per cent of all financial statement fraud in 2008, down slightly from 33 per cent in 2007.

The other top infractions were improper disclosure (18 per cent), and manipulation of expenses (16 per cent).

“If alleged revenue recognition frauds continue to decline, they could soon be at a level similar to that of other alleged financial statement fraud schemes rather than being several times more common, as has been the case during most of the decade. This may have implications for corporate fraud risk assessments and for regulatory policy,” said Howard Scheck, a partner for Deloitte Financial Advisory Services’ Forensic & Dispute Services Practice.

Across industries, financial statement fraud was most prevalent in technology, media and telecommunications companies (30 per cent in 2008), consumer business (29 per cent), financial services (18 per cent), and life sciences and health care (12 per cent). Mr Scheck noted that compared to 2007, fraud by technology and media companies had declined by six per cent, while those by financial services firms and in the consumer sector edged up. He said this could be due to increased regulatory focus on the latter industries.

“Organisations may wish to consider how financial statement risks may be changing and any impact such changes may have on the organisation’s fraud risk assessment and risk management activities,” he said.

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