PCAOB Adopts Broker-Dealer Attest and Audit Standards
by Terri Eyden on
By Jason Bramwell
The Public Company Accounting Oversight Board (PCAOB) on October 10 approved two attestation standards and an auditing standard pertaining to audits of brokers and dealers.
The new attestation standards, which cover the auditor's examination of compliance reports and the auditor's review of exemption reports, will help protect customer funds by enhancing the quality of compliance information provided to the US Securities and Exchange Commission (SEC) and used in its regulatory oversight of broker-dealers, according to the PCAOB.
The new auditing standard the PCAOB adopted on Thursday is applicable when auditors are engaged to perform audit procedures and report on supplemental information that broker-dealers and others file with the SEC. The board also adopted related amendments to other PCAOB standards.
"The standards adopted today are an important step for the board's oversight of audits of broker-dealers authorized under the Dodd-Frank Act," PCAOB Chairman James Doty said in a written statement on October 10. "They will strengthen procedures for auditors and improve the reliability of annual reports required by the SEC for oversight of customer assets held by broker-dealers."
The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Sarbanes-Oxley Act to, among other things, authorize the PCAOB to oversee the audits of brokers and dealers registered with the SEC.
On July 30, 2013, the SEC amended its Exchange Act Rule 17a-5 to require, in part, that audits of broker-dealers' financial statements and supplemental information, as well as the auditor's examination of the compliance report or the auditor's review of the exemption report, be conducted in accordance with PCAOB standards.
Prior to the amendments to Rule 17a-5, audits of brokers and dealers were required to be performed under generally accepted auditing standards issued by the American Institute of CPAs (AICPA).
In a written statement, AICPA President and CEO Barry Melancon, CPA, CGMA, said the AICPA has been consistent in its position that brokers and dealers should be subject to SEC regulation. He added that auditors of those brokers and dealers that carry, clear, or have custody of customer funds should be subject to PCAOB standards, inspections, and enforcement programs.
"The PCAOB's interim inspection program, established to determine the appropriate scope of regulation under the Dodd-Frank Act, will provide insight into which auditors should be subject to the full regulation of the PCAOB," Melancon said. "We believe it is critical that the PCAOB use risk analysis in determining which audits of broker-dealers should be included in a permanent inspection program. We urge the board to act expeditiously in determining the scope of that program."
Overview of New Standards
The new PCAOB examination standard, Attestation Standard No. 1, Examination Engagements Regarding Compliance Reports of Brokers and Dealers, establishes requirements for the auditor's examination of certain statements in broker-dealer compliance reports.
Consistent with SEC Rule 17a-5, the standard requires auditors to obtain sufficient appropriate evidence to opine on a broker-dealer's statements in its compliance report as to whether:
- The broker-dealer's internal control over compliance was effective during the most recent fiscal year;
- The broker-dealer's internal control over compliance was effective as of the end of the most recent fiscal year;
- The broker-dealer was in compliance with the net capital rule and the reserve requirements rule as of the end of the most recent fiscal year; and
- The information the broker-dealer used to state whether it was in compliance with the net capital rule and reserve requirements rule was derived from its books and records.
Additionally, the PCAOB explained that the examination standard provides requirements for auditors that:
- Focus the auditor on the matters that are most important to the auditor's conclusions regarding the statements of the broker-dealer;
- Incorporate consideration of fraud risk, including the risk of misappropriation of customer assets;
- Are designed to be scalable, based on the size and complexity of the broker-dealer;
- Coordinate the examination engagement with the audit of the financial statements and the audit procedures performed on supplemental information; and
- Describe how to report on an examination engagement, in connection with the requirements of SEC Rule 17a-5.
The new review standard, Attestation Standard No. 2, Review Engagements Regarding Exemption Reports of Brokers and Dealers, establishes requirements for the auditor's review of the statements in broker-dealer exemption reports.
In accordance with SEC Rule 17a-5, the standard requires auditors to obtain moderate assurance about the following statements in the broker-dealer's exemption report:
- A statement that identifies the "exemption provisions" under which the broker-dealer claimed an exemption;
- A statement that the broker dealer (1) met the identified exemption provisions throughout the most recent fiscal year without exception, or (2) met the identified exemption provisions throughout the most recent fiscal year, except as described in the exemption report; and
- If applicable, a statement that identifies each exception during the most recent fiscal year in meeting the identified exemption provisions and that briefly describes the nature of each exception and the approximate date(s) on which the exceptions existed.
"Both attestation standards emphasize coordination between the examination or review engagement, the audit of the broker-dealer's financial statements, and audit procedures performed on the supplemental information," Martin Baumann, PCAOB chief auditor and director of professional standards, said in a written statement. "This emphasis on coordination can promote overall audit effectiveness and avoid redundancy in the work performed."
Auditing Standard (AS) No. 17, Auditing Supplemental Information Accompanying Audited Financial Statements, establishes the auditor's responsibilities when performing audit procedures and reporting on supplemental information that accompanies the audited financial statements of broker-dealers and others, such as certain employee benefit plans that must file with the SEC audited financial statements and schedules prepared in accordance with certain financial reporting requirements of the Employee Retirement Income Security Act of 1974.
Supplemental information is often required by regulators for oversight purposes, and AS No. 17 is intended to give the SEC and other users greater confidence in the quality and consistency of supplemental information accompanying audited financial statements of broker-dealers and others. The standard also specifies other types of supplemental information that may be used.
The PCAOB explained that the standard includes auditor performance requirements to:
- Determine that the supplemental information reconciles to the underlying accounting and other records or to the financial statements, as applicable;
- Test the completeness and accuracy of the supplemental information, to the extent that it was not tested as part of the audit of the financial statements; and
- Evaluate whether the supplemental information, including its form and content, complies with relevant regulatory requirements or other applicable criteria, if any.
AS No. 17 supersedes the PCAOB's interim auditing standard, AU Sec. 551, Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents.
Cindy Fornelli, executive director of the Center for Audit Quality (CAQ), told AccountingWEB the CAQ shares the PCAOB's goal of improving audit quality and protecting investors through the issuance of standards aimed at strengthening performance requirements for audits of brokers and dealers.
"We are encouraged by the board's efforts to balance regulation and investor protection through a risk-based approach, designed to be scalable based on the broker's or dealer's size – including whether a broker or dealer has custody – and complexity, and focused on coordination between the audit of the financial statements, audit procedures performed on supplemental information of the broker or dealer, and the examination engagement," she said. "We also will continue to monitor the PCAOB's inspection program and the valuable insights that it can yield."
The PCAOB initially proposed the attestation standards and the auditing standard for supplemental information on July 12, 2011. The board adopted these standards after consideration of comments received on the proposal and as a result of the SEC amendments to Rule 17a-5 that were adopted by the SEC on July 30, 2013.
All new standards and amendments to other PCAOB standards adopted by the board are submitted to the SEC for approval. The new attestation standards and related amendments will be effective, subject to approval by the SEC, for examination engagements and review engagements of fiscal years ending on or after June 1, 2014.
If approved by the SEC, AS No. 17 and related amendments will be effective for reports on supplemental information that accompanies financial statements for fiscal years ending on or after June 1, 2014.
The effective date for the standards coincides with the effective date for the corresponding annual reporting requirements for broker-dealers under the SEC amendments to Rule 17a-5.
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