STEALING 3/5 OF SHAREHOLDER VALUE IS A BAD ACCOUNTING PRACTICE

It is wonderful when accountants go to jail for stealing. My father was an accountant for most of his life and was incredibly honest. It was a real stickler for making sure the numbers balanced and that no was stealing. The following is a tale from the SEC web site about accounts that made sure they got their share of corporate income from the Koss Corporation. Koss is a relatively small corporation that trades publicly at a current price of less than $6.00 per share. The alleged embezzlement is for $30,000,000 which is astounding in that the shareholder value in the company is less than $50,000,000. In addition, this company currently has a negative earnings per share.

Please read the following excerpt from the SEC web page to see the type of modern accounting practice that is used in some U.S. corporations:

“Washington, D.C., Aug. 31, 2010 — The Securities and Exchange Commission today charged two former senior accounting professionals at a Milwaukee-based headphone manufacturer with accounting fraud, books-and-records violations, and related misconduct arising from the embezzlement of more than $30 million from the company.

The SEC alleges that Sujata Sachdeva, who was the vice president of finance and principal accounting officer at Koss Corporation, stole money from company accounts to make millions of dollars in payments on her personal credit card and for other extravagant personal purchases from luxury retailers. With the assistance of Koss senior accountant Julie Mulvaney, Sachdeva concealed the theft on Koss’s balance sheet and income statement by overstating assets, expenses, and cost of sales, and by understating liabilities and sales. Based on the fraudulent records prepared by Sachdeva and Mulvaney, Koss prepared materially false financial statements and filed materially false current, quarterly, and annual reports with the SEC.

“Sachdeva brazenly stole millions from Koss Corporation with Mulvaney’s assistance and then used crooked accounting to cover up the theft,” said Merri Jo Gillette, Director of the SEC’s Chicago Regional Office. “Sachdeva and Mulvaney abused their positions of trust and defrauded Koss shareholders who rely upon corporate filings for accurate information about the company’s financial condition.”

According to the SEC’s complaint, filed in U.S. District Court for the Eastern District of Wisconsin, the scheme began in 2004 and lasted through December 2009. After discovering the embezzlement, Koss amended and restated its financial statements for fiscal years 2008 and 2009 and the first three quarters of fiscal year 2010. Both Sachdeva and Mulvaney have been terminated by the company.

The SEC’s complaint alleges that Sachdeva, a resident of Mequon, Wisc., embezzled funds from company accounts through a variety of means, including cashier’s checks, unauthorized wire transfers, and unauthorized payments from petty cash. Sachdeva fraudulently authorized the issuance of more than 500 cashier’s checks totaling more than $15 million. She used them to make approximately $10 million in payments to American Express for her personal credit card, and also used them to make direct payments to luxury retailers. At times, Sachdeva used acronyms in an attempt to conceal the identities of the check recipients — such as “N.M. Inc.” for Neiman Marcus and “S.F.A. Inc.” for Saks Fifth Avenue.

According to the SEC’s complaint, Sachdeva used the embezzled funds to finance an extravagant lifestyle, including prolific purchases of designer clothes, furs, purses, shoes, and jewelry as well as china, statues, and household furnishings. She also used the stolen funds to buy automobiles, pay for airline tickets and hotels during personal travel, and finance home improvements and renovations. Meanwhile Mulvaney, who lives in Milwaukee, concealed and facilitated the theft by preparing false journal entries to disguise Sachdeva’s misappropriation of funds.

The SEC’s complaint charges Sachdeva with violations of the antifraud provisions of the federal securities laws and charges both Sachdeva and Mulvaney with violations of the reporting, books and records and internal control provisions of the federal securities laws. The SEC seeks a permanent injunction, disgorgement of ill-gotten gains and financial penalties against Sachdeva and Mulvaney, and an order barring Sachdeva from serving as an officer or director of a public company.

Sachdeva entered into a plea agreement with the U.S. Attorney’s Office for the Eastern District of Wisconsin on July 27, 2010, in a parallel criminal proceeding and pled guilty to six counts of wire fraud. Sachdeva admitted her multi-million-dollar theft from company and her scheme to falsify the company’s accounting records to hide her embezzlement. Sachdeva is scheduled to be sentenced on Nov. 18, 2010.”

It is good to see these crooks caught and prosecuted by the U.S. Attorney’s office and at least one of them will face some sort of personal jeopardy. But, perhaps these people should be Deans of some our businesses schools. It is not everyone who can steal thirty million dollars from a company which has a stock holder value (market cap) of about fifty million dollars. This tale is like the tale of Rumplestilskin turning straw into gold except, the first born of the investors may not have to be taken away to pay for the gold.