From an outsider's point of view, it appears that Koss had control issues, namely in the area of segregation of duties. "If someone can have access to cash and the books, they can, on an ongoing basis, perpetuate fraud without getting caught," says Bob Benoit, president and director of SOX research at consultancy Lord & Benoit.

Without more detail on the alleged fraud, it's hard to know whether an internal-control audit would have uncovered the problems. However, the knowledge that an auditor is coming in for the extra review could have prevented Sachdeva from perpetuating the fraud, contends James D. Ratley, president of the Association of Certified Fraud Examiners, which has been actively protesting the proposed 404(b) exemption. Still, "management bears the ultimate responsibility for not noticing her lavish lifestyle and the auditors for not noticing anomalies in the company's financial reporting," he tells CFO.

Coenen is critical of the other executives and Koss's board for not picking up on the alleged fraud sooner. The company could have been alerted to the problems by having a fraud hotline and giving employees (such as Sachdeva's assistant) a way to raise suspicions, she says.

Based on his company's outreach to potential clients, Benoit believes many small companies are not complying with 404(a), even though their management says they have effective internal controls in their annual reports. "It appears many outside auditors are looking the other way" and not verifying that internal-controls assessments are getting done, he says.

While Michael Koss certified the company's financials and internal controls in the latest annual report under his dual titles of CEO and CFO, Sachdeva signed the 10-K as the company's principal accounting officer. She had been working at Koss since at least 1997, when she praised the merits of telecommuting to CFO. At the time, she was managing a nine-person finance department from her home in Texas, 1,200 miles from Koss's Milwaukee headquarters. She later moved closer to the company but was known to take work home with her. The government's complaint says she made the questionable wire transfers from her office at Koss, where the CEO apparently found several piles of clothing with the price tags — totaling over $2,000 — still attached.

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