Koss Corporation Case Study: Governance, Internal Controls, and Ethics

This case study examines the fraudulent activities and internal control failures at Koss Corporation. It identifies issues such as large unauthorized payments, inadequate petty cash management, outdated accounting systems, and insufficient management review of financial statements. The analysis highlights the problems in corporate governance, specifically the lack of oversight and the absence of a robust internal audit team. The study emphasizes the importance of the Sarbanes-Oxley Act (SOX) in improving corporate governance by mandating personal certification of financial statements and protecting whistleblowers. The actions of Julie Mulvaney are scrutinized, emphasizing her ethical and legal responsibilities in reporting fraudulent activities. The document references relevant academic sources to support the findings and recommendations, providing a comprehensive overview of the case and its implications for corporate governance, internal controls, and ethical conduct.

CORPORATE SOCIAL
RESPONSIBILTY

TABLE OF CONTENTS
Fraudulent Activities and Internal Control......................................................................................1
Problems in the Corporate Governance...........................................................................................1
Actions to be taken by Julie Mulvaney............................................................................................2
References........................................................................................................................................3

Fraudulent Activities and Internal Control
From the case study, it has been determined that the fraudulent activities addressed were
large payments made by check or wire transfer, wrongly payment done through petty cash, an
old format of computerized accounting system used by the business, unprepared account
reconciliations and the major operation was the minimal management review of financial
statements (DeFond & Lennox, 2017). All such fraud acts is now become common for the
businesses, the internal control by the management was missing in the Sujata’s case which can
be avoided by following functions:
 Wire transfer or check payment must be made only at full signature of the authority
rather than just initials. Bank should verify the high amount payment or withdrawals by
confirming it with authority over telephonic or video call conversation.
 Petty cash accounts should be maintained up to a certain level only. It is for small
expenses occurred during the functioning. In that case, small sum of funds would
overcome the needs.
 Updated computerized accounting system needs to be adopted.
 Management team of directors should weekly or monthly review the financial statements
in an order maintain a check over the funds flow.
Sarbanes-Oxley Act (SOX) is accounting system that creates a Public Company Accounting
Oversight Board with the instructions of manage the accounting industry of a company. The
internal controls made by them were banning company’s loans to its managers, giving job
protection to employee that reports fraud and making financial literacy of corporate boards
(Bartov & Faurel, 2016).
Problems in the Corporate Governance
It has been detected from the case study that there are problems in the organizational
structure of the company which eventually allows Sujata to perform fraudulent activities. From
the managerial structure it is attained that Sujata has no superiors over her. Secondly, their
should be internal as well as auditors team to check the accounting statements. Moreover, SOX
method of accounting would be highly beneficial in this case due to following reasons:
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 It supports Section 404 that requires corporate managers needs to personally certify (in
written) the accuracy of financial statements. This prssurizes the executives to control
internal structure and procedures for reporting fair financial statements (Albuquerque &
Zhu, 2019).
 It creates a Board to check, examine and implement the compliance of the company. It
prohibits to link accounting firms with their auditing companies.
 It regulates the company to maintain internal and external audit to attain similar results.
 It helps in protecting the jobs of employee who informs about the fraud or wrongful
operation.
Actions to be taken by Julie Mulvaney
By the study, it is clear that Julie Mulvaney should have informed the high authority
about the fraudulent activities of Sue Sachdeva. She helped the guilty by covered up Sue’s
embezzlement by producing forging entries which eventually makes Julie fraud as well. She was
an employee of Koss Company and thus, it was her duty to inform about this fraud conduct to
management. By hiding and helping in the embezzlement, gives the company a right to take
legal actions against Julie. As SOX assist employees in protecting their jobs who reports about
fraud and testify fraudster employer in court (Yermack, 2017).
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References
Albuquerque, A., & Zhu, J. L. (2019). Has Section 404 of the Sarbanes–Oxley Act discouraged
corporate investment? New evidence from a natural experiment. Management
Science, 65(7), 3423-3446.
Bartov, E., & Faurel, L. (2016). Sarbanes–Oxley Act and patterns in stock returns around
executive stock option exercise disclosures. Accounting & Finance, 56(2), 297-332.
DeFond, M. L., & Lennox, C. S. (2017). Do PCAOB inspections improve the quality of internal
control audits?. Journal of Accounting Research, 55(3), 591-627.
Yermack, D. (2017). Corporate governance and blockchains. Review of Finance, 21(1), 7-31.
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