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The Problem with Incestuous Management

You're going to love this story.

Koss, a 57-year old Milwaukee-based manufacturer of stereo headsets, has fired its VP of finance, Sujata "Sue" Sachdeva, for allegedly embezzling $31 million from the firm to fund a lavish lifestyle of ridiculously expensive clothes, jewelry, and other accouterments of that nature. The publicly traded company will apparently be restating its financials going back to 2005. Trading in its stock has been halted since December 21st.

Sachdeva, who worked at Koss for 18 years, allegedly used her position as head of finance to authorize large wire transfers and cover her tracks by cooking the books. In fact, it was American Express that blew the whistle when it noticed that payments for Sachdeva's personal credit card were coming from Koss's bank account. Otherwise, this might have gone on for another five years before the sleepy company found out.

Which brings up a few questions you've got to ask yourself.
How is it that nobody noticed $5 million missing each year when the company's net income is about $5 million? I mean, the business of "stereo headsets" isn't really a complex business model. There's revenue, cost of sales, and expenses. How do you somehow manage to hide $5 million when expenses are only $10 million -- and cost of sales is $25 million?

The answer becomes clear when you look at the company's management team. Michael Koss is the company's CEO. He's also the company's vice chairman, president, COO, and CFO. The company's VP of sales is, that's right, John Koss. Together they own 65 percent of the company's stock. Another Koss, John Jr., owns 8 percent of the company's stock. Who knows how many other Kosses there are scattered about the place. No checks and balances there. No hands on the wheel, either.

If I've said it once I've said it a thousand times, steer clear of incestuous companies; they're cesspools of dysfunctional management. Companies structured like Koss should never be allowed into the public markets.

Of course, Koss fired its independent auditor, Grant Thornton, which promptly fired back, in a statement, that it wasn't hired "to conduct an audit or evaluation of internal controls over financial reporting. Establishing and maintaining effective internal controls is management's and the board's responsibility."

I couldn't agree more.

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