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Broker-Dealer Audit Deficiencies ‘Continue at a High Level,’ PCAOB Says

Aug 19th 2016
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The Public Company Accounting Oversight Board (PCAOB) identified deficiencies in 77 percent of the audits of broker-dealers inspected in 2015, according to a report released by the US audit watchdog on Aug. 18.

The PCAOB also found deficiencies in the work of 96 percent of the audit firms inspected last year under the board’s interim broker-dealer auditor inspection program.

“The percentage of deficiencies in the audits covered by the inspections in 2015 continue to occur at a high level – 77 percent, although this was lower than the 87 percent in 2014,” the report states. “In addition, deficiencies were identified in 55 percent of the attestation engagements in 2015.”

The interim inspection program was implemented in August 2011 in response to new oversight authority given to the PCAOB over auditors of US Securities and Exchange Commission-registered brokers and dealers by the Dodd-Frank Act.

The annual report, the fifth issued by the PCAOB under the interim program, covers inspections of 75 audit firms and portions of 115 audits and related attestation engagements.

This was the first annual cycle in which all audits and related attestation engagements were required to be performed in accordance with PCAOB standards. It also marked the first time new attestation engagements were included in the inspections.

Here’s a breakdown of the deficiencies found by inspectors:

Deficiencies at the Firms Inspected

  • In the audits of 72 of the 75 firms.
  • In the attestation engagements at 54 of the 74 applicable firms.

Deficiencies in the Audits

  • Revenue (70 percent of the audits).
  • Related-party transactions (32 percent, compared to 21 percent in 2014).
  • Related to the net capital rule (30 percent), including a high number of deficiencies related to auditing the securities haircuts component of the net capital computation.
  • Related to the customer protection rule (53 percent, compared to 43 percent in 2014).

Deficiencies in the Attestation Engagements

  • In 78 percent of the examinations of compliance reports.
  • In 34 percent of the reviews of exemption reports.

Deficiencies in the Required Engagement Quality Reviews

  • In 57 percent of the audits.
  • In 48 percent and 34 percent of the attestation engagements related to the compliance and exemption reports, respectively.
  • For seven audits and seven attestation engagements, no engagement quality review was performed.

“Many deficiencies were observed in financial statement audit areas similar to prior years,” the report states. “In addition, many deficiencies also related to new standards or standards that were new for the auditor.”

The report also revealed that auditor independence appeared to be impaired in 7 percent of the inspected audits of broker-dealers, compared to 25 percent in 2014. Of the eight audits with independence findings in 2015, six were conducted by firms that did not audit issuers.

“While there were fewer independence findings, it is very troubling that we continue to find auditors assisting in the preparation of the financial statements they audit or providing bookkeeping services to their audit clients,” Robert Maday, deputy director of the PCAOB Division of Registration and Inspections and program leader of the PCAOB Broker-Dealer Firm Inspections Program, said in a written statement. “Auditor independence continues to be a focus of our inspections.”

PCAOB staff is currently working to develop, for the board’s consideration, a rule proposal to establish a permanent inspection program.

Related article:

Deficiencies Continue to Plague Audits of Broker-Dealers