In The News

Can you imagine hiding an embezzlement of $34 million in a company with $40 million in annual revenue? That’s what a financial officer at Koss did. Koss is a small public company with 70 employees. The company designs, manufactures, and distributes stereo headphones.

Sujata “Sue” Sachdeva was CEO Michael Koss’ trusted friend and financial aide – that is, until December 2009 when he realized she had stolen millions from the company.

It’s hard to imagine a credit card processor would allow someone to transfer $30.9 million in corporate funds to pay personal credit cards bills. In fact, it was American Express that broke the news of the embezzlement to the company.

It’s hard to imagine how auditors could miss that much money for so long. Koss wondered the same thing and sued their auditors for gross negligence.

It’s hard to imagine how someone could rack up over $30 million in credit card debt over five years.

It’s hard to imagine how someone with an annual salary of around $200,000 could escape detection for over five years while indulging an extraordinarily lavish lifestyle.

This is an extreme case of audacious greed. Many of Sue’s extravagant designer purses and designer shoes were discovered with price tags intact.  How could this happen and why should you care? You should care because similar circumstances cause businesses large and small to downsize or close their doors every year.

Sue Sachdeva was a long-term trusted employee, a personal friend of the CEO, and there was little or no oversight of the finance department on the part of the CEO, audit committee, or board of directors. The business was run “like a family.” Family members trust each other. Everyone trusted Sue.

Surprisingly enough, the typical profile of an embezzler is a long term, trusted employee who is conscientious, industrious, competent, trustworthy, and reliable. Because of these characteristics, the morally flexible employee achieves a position involving little or no oversight — which is like a license to steal.

Certainly embezzlers can be surly and defensive (to keep people from looking at their work) and often have a problem they’ve shared with no one – like a gambling or drug addiction, or a shopping addiction that provides a periodic respite for depression.

Embezzlers are really nice people, which is why they can steal for years and avoid suspicion, even if, like Sue, they are living far, far beyond their means.

Why didn’t the auditors catch it? A common misconception is that auditors are required to look for fraud. On the contrary, auditors review internal controls to identify the extent of testing needed to determine if the financial statements are free from material misstatement. Auditors must notify the company if they notice fraudulent or suspicious transactions, but they are not required to look for fraud.

Koss is an extreme example of an egregious embezzlement, but all organizations can and should learn from Koss’ experience. How can companies avoid giving trusted employees a license to steal?

Trust, but verify. It’s okay to trust your employees, but it’s possible to trust too much. Build checks and balances into your processes and take a hands-on approach to oversight. Don’t give anyone in your organization a license to steal.