PCAOB Report Highlights Deficiencies in Broker-Dealer Audits

By Jason Bramwell

Officials from the Public Company Accounting Oversight Board (PCAOB) said on August 19 that deficiencies were found in all sixty of the broker-dealer audits conducted by audit firms that the PCAOB inspected last year – and in 95 percent of the individual audits selected for inspection.

The findings of the inspection were highlighted in the PCAOB's second progress report on its interim inspection program for auditors of brokers and dealers that was released on Monday. The report covers the audit deficiencies and independence findings identified in inspections performed from March 2012 to December 2012.

Last August, the PCAOB released its initial progress report on broker-dealer audits, in which inspectors reviewed ten audit firms covering portions of twenty-three audits of brokers and dealers registered with the US Securities and Exchange Commission (SEC) from October 2011 to February 2012. Deficiencies were found in all of the audits inspected.

For the newest report, PCAOB inspectors reviewed forty-three audit firms covering portions of sixty audits of brokers and dealers registered with the SEC. Of the forty-three audit firms inspected, nineteen were subject to regular PCAOB inspection, as they also audited public companies or other issuers. The remaining twenty-four firms were not subject to PCAOB inspection other than under the interim inspection program.

Deficiencies were noted in the audits of all of the firms inspected and in fifty-seven of the sixty individual audits selected for inspection. Inspection staff did not identify deficiencies in every selected portion of the audits, according to the PCAOB.

In addition, contrary to the requirements of SEC independence rules, inspectors found that some auditors were involved in the preparation of the financial statements that they audited. Independence findings were identified in twenty-two of the sixty audits selected for inspection and in approximately 80 percent of the audits selected for inspection that were performed by firms that audited broker-dealers but did not audit issuers.

"Even though we inspected more firms and more audits than what we reported last year, the results are very similar and, in one word, disappointing," Board Member Jay Hanson said during a media conference call on August 19. "We have a long ways to go to ensure compliance with the audit requirements in this area. It really points to a need for at least the firms that we inspected to really up their game. It's going to take a strong desire to improve as well as a focused effort on improving."

The broker-dealer audits inspected were required to be conducted under generally accepted auditing standards issued by the American Institute of CPAs (AICPA), not under PCAOB standards.

The most frequently noted audit deficiencies were found in the following areas:

  • Audit procedures related to the computations of the customer reserve and net capital requirements
  • Audit procedures related to financial statement areas, including procedures regarding tests of revenue, related parties, and the risk of material misstatement due to fraud

This year, the PCAOB plans to inspect approximately sixty audit firms covering portions of about ninety audits, and by the end of 2013, the interim inspection program will include inspections of portions of more than 170 audits of brokers and dealers conducted by approximately 100 registered public accounting firms.

From Interim to Permanent?

The PCAOB anticipates presenting a rule proposal for a permanent inspection program in 2014 or later, and it will continue the interim inspection program until new rules for a permanent program are adopted and become effective.

On July 30, the SEC approved amendments to Exchange Act Rule 17a-5 that affect certain annual reporting, audit, and notification requirements for brokers and dealers. These amendments include the requirement that the audits of brokers and dealers be conducted in accordance with PCAOB standards for fiscal years ending on or after June 1, 2014.

Forums on Auditing Smaller Broker-Dealers

The Public Company Accounting Oversight Board (PCAOB) on August 19 announced that public forums on auditing smaller broker-dealers will be held on October 31 in Jersey City, New Jersey, and November 20 in Las Vegas.

The forums are designed to share important information about PCAOB activities with PCAOB-registered public accounting firms that audit brokers and dealers. The forums also provide an opportunity for board members and PCAOB staff to hear the questions, comments, and concerns of auditors working with smaller brokers and dealers.

Forum discussion topics will include:

  • Audit deficiencies and independence findings related to the PCAOB's interim inspection program for audits of brokers and dealers
  • Guidance for transition to PCAOB auditing standards applicable to audits of brokers and dealers

There is no fee to participate in the forums, but preregistration is required. Attendees also have the opportunity to earn CPE credits.

More information on the forums is available on the PCAOB website. To register, contact Margaret Hopkins at 202-207-9081 or by e-mail.

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 interim program has two purposes. First, it enables the PCAOB to assess the compliance of registered firms and their associated persons conducting audits of brokers and dealers with the Sarbanes-Oxley Act (SOX), PCAOB, and SEC rules, and professional standards. Second, it informs the PCAOB's eventual determinations about the scope and elements of a permanent inspection program.

"At this time, the board has not made any determinations with respect to the scope or elements of a permanent inspection program," Robert Maday, PCAOB deputy director of the Division of Registration and Inspections and program leader of the Broker-Dealer Firm Inspections Program, said on Monday morning. "We continue to gather information. We have made progress in obtaining data about brokers and dealers, which is sometimes difficult to do, as much of the information is not publicly available."

Maday, who called the second report's independence findings and audit deficiencies "troubling," said firms should take appropriate action to prevent or correct any such deficiencies.

"Our interim inspections program continues, as we are well into our inspections for 2013," he concluded. "We hope firms take advantage of our inspections and take appropriate action to improve the quality of the audits they perform."

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