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From Securities Regulation Daily, May 15, 2013

PCAOB Brings First Action for Violation of Accounting Standard No. 7

By John Filar Atwood

The PCAOB has issued an order censuring accounting firm Michael F. Cronin, CPA and its owner and sole employee for violations of Exchange Act Section 10A(j) and Rule 10A-2, the PCAOB’s rules and Accounting Standard No. 7 (AS 7) in connection with its audits of five issuer clients. PCAOB Chairman James Doty said that it is the first time the PCAOB has brought an action for a violation of AS 7. In addition to the censure, the PCAOB revoked Cronin’s registration, barred him from being an associated person of a registered public accounting firm and imposed a civil penalty of $10,000.

AS 7. AS 7 requires that an accounting firm have an engagement quality review performed, including a concurring approval of issuance, for all audits and interim reviews for fiscal years beginning on or after December 15, 2009. Under the standard, Cronin was required to have an engagement quality review performed on its fiscal 2011 audit of Odyssey Pictures Corp.

Cronin was hired as Odyssey Pictures’ external auditor in August 2011 for the audit of its financial statements for the year ended June 30, 2011. The firm issued an audit report dated October 13, 2011, expressing an unqualified opinion on Odyssey Pictures’ financial statements that accompanied the company’s Form 10-K filed with the SEC on the same day.

Under AS 7, Cronin was required to allow Odyssey to use the engagement report only after the engagement quality review was completed and the reviewer provided a concurring approval of issuance. The PCAOB claims that, although Cronin knew that an engagement quality review needed to be performed, the firm failed to have it done. Cronin planned for a partner at another firm to perform the review, but he failed to notify the partner in time and the engagement quality review was not performed.

Baltia audits. In addition to a violation of AS 7, the PCAOB stated that Cronin failed to comply with PCAOB auditing standards in connection with the audits of Baltia Air Lines, Inc.’s financial statements for the years ended December 31, 2007, and December 31, 2009. The PCAOB claims that Cronin failed to obtain sufficient competent evidential matter, failed to exercise due professional care, and failed to exercise professional skepticism in connection with the 2007 and 2009 Baltia audits.

In particular, the PCAOB claims that during the 2007 and 2009 audits, Cronin became aware of information indicating that certain payments were being made to, or on behalf of, officers of Baltia. After becoming aware of the payments, Cronin failed to determine the nature of the payments to the Baltia officers.

In addition, despite being aware of the payments and the lack of disclosure in the financial statements related to them, Cronin failed to exercise due care and professional skepticism, according to the PCAOB. Other than obtaining management representations, Cronin failed to take any steps to evaluate the nature of the payments to determine whether any related party transactions should have been disclosed.

Other violations. The PCAOB also found that Cronin repeatedly violated Exchange Act Section 10A(j) and Rule 10A-2, as well as PCAOB rules and standards that require a firm and its associated persons be independent of the firm’s audit client throughout the audit and professional engagement period. The PCAOB claims that Cronin was not independent with respect to four issuer clients because he served as lead partner on two issuer audits for more than five consecutive years and served as lead partner on two other issuer audits within the five-consecutive-year period following the performance of services as the lead partner for the maximum permitted period.

Cronin consented to the entry of the order instituting disciplinary proceedings and imposing sanctions without admitting or denying the claims made therein. Cronin may reapply for registration with the PCAOB after three years from the date of the order.

Companies: Baltia Air Lines; Michael F, Cronin, CPA; Odyssey Pictures Corp.

MainStory: TopStory AccountingAuditing PCAOBNews

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