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Audit Firm Violates Independence Spectacularly

Has it been awhile since we've discussed an egregious independence violation committed by an audit firm? Yes, I think it has.

The drought ends with this PCAOB disciplinary order in the matter of Moss, Krusick & Associates ("MKA") and Joseph M. Krusick, CPA.

Krusick was the engagement partner on Credit One Financial, Inc. a company with an unusual structure:

Now, maybe it's just me, but does going from producing and selling graphite to being an "exclusive advertising agent for a Macau-based television company," seem a little extreme? That company sounds more indecisive than 7th-year college senior. 

Anyway, this gets off to a rough start right off the bat (keeping in mind that MKA and Krusick are the "respondents"):

Even that 7th-year senior who just switched his major from biology to accounting can see the problem here.

What's sorta funny is that Krusick knows this is going on and is a little uncomfortable with the arrangement. Specifically, he, "expressed concerns that Moss Krusick's assistance to Credit One could be viewed as impairing the Firm's independence and the PCAOB could inspect Moss Krusick's Credit One audits." He suggested Credit One "engage a firm in China to assist it," but apparently Credit One didn't like that idea and asked Krusick to "find a local accountant in Florida to do this work." As you might have already guessed, that arrangement was a little strange, too:

For the next four years, the "Accountant" prepared financial statements and MKA audited them. Except, and you're probably noticing a trend here, there wasn't much difference between MKA and the "Accountant":

It gets better, actually. MKA billed Credit One $2,500 per quarter for the Accountant's services. Krusick, in turn only paid the Accountant $1,250 or $1,500 and pocketed the difference. Nice, right?

Haha, no no no. No, you can't do any of that if you audit public companies. So in February 2014 when "an accountant newly employed by the Firm" started asking questions about this arranagement, MKA "initiated telephone consultations" with an SEC specialist with their firm's national association. And I'll bet you think this is where the jig is up, right? Wrong!

For all that impressive disregard for auditor independence, MKA loses its PCAOB registration for two years and will pay a $10k fine. Mr. Krusick agreed to a 2-year ban and $5k fine.