Curmudgeon's Corner

How Could This Happen?

Posted by Al Campbell on Jan. 12, 2010

Potpourri, Quality of Life, People Making A Difference

Koss Corporation has been in the news for some time over the diversion of funds by at least one employee.

Each time a new story is printed, the estimate of dollars involved rises.  The latest number being discussed is about $31 Million, with $10 Million of that having been siphoned from the company's account in the first two quarters of their fiscal year 2010.  The losses are now reported to have originated prior to 2005 but the company says it will only look at the books for 2005 and later.

Koss is publicly traded but only lightly traded.  Some 73% of the company is owned by the family.

I have been plagued with a simple question since this was first reported:  How could this happen?

Koss is not a huge corporation by current standards.  It has never been wildly profitable; it has had great products; it has always been controlled by the family.

There is a Board of Directors for Koss just as there is for any corporation.  This board is charged with overseeing the company for which it has been made responsible.  There are company officers that report to the board and those officers are responsible to the board for the proper operation of and reporting about the company.  Publicly traded companies are held to a much higher standard than are privately held companies for obvious reasons.

How could this happen?

There will be a long period over which facts will dribble out.  A class action suit is being 'explored' by a west coast law firm.  Insurers will be hip deep in the muck.  Accounting/auditing firms will be involved.  The alleged culprit has, so far, not mounted a very aggressive defense.  She has seemingly been cooperative at least to the point of providing high level information about where all the goodies she purchased were stored.  Incidentally, some of the merchandise was still in her offices at Koss Corporation when the company locked her out and still had the price tags attached.  It has been reported that she spent $1.3 Million with one Mequon clothing emporium in a couple of years.

Apparently this might still be going on had the American Express organization not seen her credit card bill being paid with funds drawn on a corporate account.  It was American Express that advised the company of this fact and that triggered the events that have followed.  Had that not occurred,  for how much longer would this have continued?

All this does not speak well about the manner in which this company was being run.  I have had the opportunity to be part of several reasonably good sized organizations, two of which were publicly traded.  I cannot imagine this occurring in any of the firms I have been part of given the stringent reporting and auditing programs that existed. 

I suspect that, at the end of this story, we will learn that there was not enough oversight by people inside the organization.  We will probably learn that people in high office were not subject to internal controls, at least to internal controls they couldn't have bypassed.  That suggests there may be others who were complicit, either knowingly or unknowingly. 

My opinion is that we'll come to understand that this company was not very well run.

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The Curmudgeon Blog today is titled "Enough Already!".