PCAOB: Deficiencies Continued in 2013 Broker-Dealer Audits

While audits of broker-dealers showed some improvement last year compared to previous years, 71 of 90 broker-dealer audits inspected by the Public Company Accounting Oversight Board (PCAOB) in 2013 were still found to have audit deficiencies or audit-independence issues, according to a new report released on Monday.

Also, according to the third progress report on its interim inspection program for auditors of brokers and dealers registered with the US Securities and Exchange Commission (SEC), the PCAOB found deficiencies in 56 of 60 firms that conducted broker-dealer audits.

The interim inspection program was implemented in August 2011 in response to new oversight authority given to the PCAOB over auditors of SEC-registered brokers and dealers by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The PCAOB issued its initial progress report in August 2012. Its second progress report was released in August 2013.

PCAOB: Be ‘Proactive’ to Prevent Audit Deficiencies

The PCAOB urged registered public accounting firms to be proactive in considering how to prevent similar or other audit deficiencies found in the third progress report by seeking ways to better anticipate and address risks that might arise in specific broker-dealer audits.

The board also encouraged these firms to continually stress to their personnel the critical need to conduct audits with due professional care, including professional skepticism. Firms should take action to review the following:

  • Agreements for services performed for broker-dealer audit clients to ensure that services, including preparation of financial statements, that would violate SEC independence rules will not be provided.
  • Guidance and training to ensure all professionals are aware of the SEC independence requirements applicable to audits of brokers and dealers.
  • Quality-control procedures to ensure compliance with applicable SEC auditor independence requirements, including prohibition of involvement in the preparation of financial statements that the firm audits.
  • Firm guidance and training to determine that the topic areas of the observed audit deficiencies identified in the report are given appropriate attention.
  • Policies for supervision, including review, to ensure their partners and supervisory personnel are placing appropriate attention on these areas.

In the second progress report, deficiencies were found in all 60 of the broker-dealer audits conducted by audit firms that the PCAOB inspected in 2012, as well as in 95 percent of the individual audits selected for inspection. In it first progress report, inspectors reviewed 10 audit firms covering portions of 23 audits of SEC-registered brokers and dealers from October 2011 to February 2012. Deficiencies were found in all of the audits inspected.

Robert Maday, deputy director of the PCAOB Division of Registration and Inspections and program leader of the PCAOB Broker-Dealer Firm Inspections Program, said many of the observations noted during the 2013 inspections have not changed from prior year’s inspections and relate to fundamental auditing principles.

“We again urge firms that audit broker-dealers to re-examine their audit approaches, and we remind firms that independence rules applicable to broker-dealer audits prohibit bookkeeping or financial statement preparation by the auditor,” he added in a written statement.

According to the third progress report – which comprised audits selected for inspection during 2013 that had financial statement periods ended on June 30, 2012 through June 30, 2013 – audit deficiencies were found in portions of 70 of the 90 audits. Independence findings were found in 21 of the 90 audits, where firms helped with the bookkeeping or preparation of the financial statements they audited, contrary to SEC rules.

The most frequent audit deficiencies were noted in financial statement audit areas, including auditing revenue recognition, the auditor’s response to the risk of material misstatement due to fraud, and audit procedures to rely on records and reports from service organizations, according to the PCAOB.

Deficiencies were also found in areas specific to the audits of broker-dealers, including auditing the net capital computation and the audit work performed for the auditor’s report on material inadequacies.

Inspections are well underway for 2014, as the PCAOB plans to inspect approximately 60 audit firms covering portions of approximately 100 audits. These inspections include firms and audits where observations were found in previous inspections. Inspectors also will evaluate whether – or how – firms addressed audit deficiencies or independence findings, the PCAOB noted.

The interim inspection program will continue in 2015, according to the PCAOB. Audits selected for these inspections will have fiscal years ending on or after June 1, 2014, and will be required to adhere to PCAOB standards.

The PCAOB is expected to issue a proposal for a permanent inspection program in 2016, which will include a consideration of whether to exempt any category of registered firms from the program.

This past June, the PCAOB issued staff guidance to assist auditors of SEC-registered brokers and dealers plan and perform audits in accordance with PCAOB standards as mandated by the Dodd-Frank Act and SEC rules.

The guidance highlights relevant requirements for SEC-registered broker-dealer audits and attestation engagements, and provides direction on the application of PCAOB standards to these engagements, particularly for audits of smaller broker-dealers with less complex operations.

In addition, the publication points out some of the significant provisions of SEC Rule 17a-5 and PCAOB standards and rules applicable to audits of broker-dealers.

Related articles:

PCAOB Issues Audit Guidance on Brokers and Dealers
PCAOB Report Highlights Deficiencies in Broker-Dealer Audits
PCAOB Issues Interim Inspection Program Report

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