The Public Company Accounting Oversight Board has censured the engagement partner who oversaw audits at Koss Corp., where a top finance executive ended up in prison on charges of embezzling more than $30 million.
The PCAOB imposed a censure and a two-year restriction on the professional practice of Melissa Koeppel, a former partner at Grant Thornton who had already been disciplined by the Securities and Exchange Commission in a separate matter. The PCAOB’s 185-page release on the Koeppel action provides a rare glimpse into the tension between auditors and the PCAOB over what constitutes lapses in professional judgment as compared with outright negligence.
Koss is small, publicly held maker of stereo headphones based in Milwaukee, where the company’s longtime vice president of finance, Sujata Sachdeva, was indicted by the Federal Bureau of Investigation in early 2010 on fraud charges. American Express tipped off the FBI when it noticed big charges to a company credit card for seemingly personal purchases. Sachdeva was sentenced to prison for 11 years and was released in 2017 after serving six years. The SEC also took civil action against Sachdeva.
Koeppel oversaw audits at Koss for fiscal years ending June 30, 2006, 2007, and 2008, according to the PCAOB. Koss restated its results for 2008 and 2009, primarily to adjust for “fraudulent, unauthorized transactions by members of its accounting department” dating back to 2005, the PCAOB said. As a smaller public company, Koss was not subject to Sarbanes-Oxley Section 404(b), which is the external audit of internal control over financial reporting.
The PCAOB’s Division of Enforcement brought charges against Koeppel alleging failures in exercising due professional care and failures to obtain sufficient audit evidence and assurance, citing multiple auditing standards. The PCAOB took exception with work in testing journal entries for potential material misstatement due to fraud, including problems with analytical procedures, support for the reliability of internal reports, and testing of accounts receivable.
The hearing officer in the case initially dismissed the charges against Koeppel, prompting the PCAOB’s Division of Enforcement to appeal for a board-level review. The enforcement division wanted to impose a three-year bar on Koeppel from associating with any registered firm and a civil penalty of $150,000, plus requirements for additional professional education and training before she could be reinstated.
As the case wound its way through legal channels, the SEC meanwhile took separate action against Koeppel and another Grant Thornton auditor, Jeffrey Robinson, on two other engagements, Assisted Living Concepts and Broadwind Energy. “During the course of those engagements, Koeppel and Robinson repeatedly violated professional standards while ignoring numerous red flags and fraud risks that allowed ALC and Broadwind to file numerous reports with the commission that were materially false and misleading,” the SEC said. In 2015, the SEC barred Koeppel from appearing or practicing before the SEC, permitting application for reinstatement after five years, and fined her $10,000.
The PCAOB release says Koeppel defended her work in the Koss case by pointing to the favorable testimony of fellow auditors and calling the PCAOB action a second guessing of her professional judgments only after the discovery of fraud. She said any departures from standards represented mistakes or errors in judgment rather than negligence. She told the PCAOB she was already being penalized because she longer performed audits, no longer managed Grant Thornton’s Wisconsin practice, and lost her position as a partner in the firm, all of which had exacted a financial toll even as she was the principal wage earner for her family, which consisted of college-aged children.
Grant Thornton did not comment on the case except to indicate that Koeppel is no longer with the firm, although her online professional profile suggests she has not yet separated. Koeppel could not be reached for comment.
The PCAOB’s release said the board determined “at this stage, it suffices” to limit’s Koeppel’s professional activities by essentially prohibiting her from performing any audit role on any public company engagement for two years.