This week Koss Corp (NASDAQ:KOSS) announced that Sujata “Sue” Sachdeva was fired from her position as Vice President of Finance for stealing at least $4.5 million from the company. Two members of the accounting staff Sachdeva supervised were suspended without pay.

And then the estimate of losses went up to $20 million. The theft occurred between 2006 and 2009, and the company has said that none of the financial statements for those years can be relied on.

The fraud scheme was simple: She used the company’s money to buy millions of dollars of clothing and jewelry. Interestingly, in just two years, she spent over $1.3 million at one local boutique.

And here’s where it gets crazy… For the year ended 6/30/09, Koss had sales of $38.2 million and profits of $2 million. For the year ended 6/30/08, Koss had sales of $50 million and profits of $4.5 million.  If Sachdeva stole $20 million over the last four years, that’s $5 million per year…. and far exceeds the profits for the last couple of years. How did no one notice?

The simple answer has to be that Sachdeva had too much autonomy at Koss. No one else was looking after the numbers. This is not some insignificant theft. There had to be some indication in the company’s numbers that something was wrong. The other executives and the members of the board of directors had a duty to pay closer attention to the numbers.

Annual audits didn’t discover the fraud, and that’s not surprising, since financial statement audits are not designed to detect fraud.

It looks like Koss will become the poster child for internal controls. The company clearly had to have deficient internal controls if the VP of Finance could use millions of dollars in company funds to pay her personal credit cards.  We’re talking over $400,000 a month on average (if the $20 million figure is accurate) and that amount is clearly material to the company (i.e. that amount should not have gone unnoticed).