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Deficiencies Continue to Plague Audits of Broker-Dealers

Aug 21st 2015
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High levels of deficiencies found in audits of broker-dealers continues to be an issue that shows no signs of improvement.

According to a report issued by the Public Company Accounting Oversight Board (PCAOB) on Aug. 18, inspections staff found deficiencies at each of the 66 firms inspected in 2014 under the US audit watchdog's interim inspection program and in 92 of 106 broker-dealer audits (87 percent) that were reviewed.

In addition, 26 of the 106 audits selected for inspection failed to satisfy auditor independence requirements.

“The high number of independence findings is especially troubling because most of the violations relate to longstanding US Securities and Exchange Commission (SEC) independence rules regarding involvement in the preparation of the financial statements,” the PCAOB wrote in its report.

In 2013, audit deficiencies were found in portions of 70 of 90 broker-dealer audits (78 percent) that were inspected by PCAOB staff. Independence findings were found in 21 of the 90 audits.

“We have been urging firms that audit broker-dealers to re-examine their audit approaches due to ongoing issues identified during inspections,” 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.

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.

This latest report, the fourth issued by the PCAOB under the interim program, covers inspections conducted in 2014 of audits for fiscal years that ended on or before May 31, 2014. All of the audits included in the report were required to be performed under Generally Accepted Auditing Standards, but starting with fiscal years ended on or after June 1, 2014, audits of broker-dealers will be required to be performed in accordance with PCAOB standards.

Of the 66 audit firms inspected in 2014, 27 firms were already subject to PCAOB inspection because they audited public companies; 39 firms were not subject to inspection other than under the interim inspection program.

According to the PCAOB, the most frequent audit deficiencies were observed in the following areas:

  • Revenue recognition (72 percent)
  • Reliance on records and reports (57 percent)
  • Fair value accounting estimates (44 percent)
  • Financial statement presentation and disclosures (44 percent)
  • Audit procedures related to the customer protection rule (43 percent)

Audit deficiencies involve auditors omitting, or insufficiently performing, certain audit procedures, the PCAOB says. They do not necessarily indicate that there are errors in a broker-dealer's financial reporting or that the broker-dealer was not in compliance with relevant SEC rules.

According to the report, when an audit firm discovers deficiencies after the date of the audit report, it should do one or more of the following:

  • Perform additional audit procedures.
  • Inform a client of the need for changes to its financial statements, supporting schedules, or supplemental report on material inadequacies.
  • Take steps to prevent reliance on previously expressed audit opinions.

The PCAOB also urges registered public accounting firms to do the following:

  • Be proactive in considering how to prevent similar or other deficiencies and findings by seeking ways to better anticipate and address risks that might arise in specific broker-dealer audits.
  • Stress to their personnel the critical need to conduct audits with due professional care, including professional skepticism.
  • Have effective procedures for practice monitoring, including performing effective analyses of the root causes of identified deficiencies.
  • Make certain to have in place a system of quality control that is designed to provide reasonable assurance of compliance with the SEC's independence requirements and provide guidance and training to firm personnel.

Related article:

PCAOB: Deficiencies Continued in 2013 Broker-Dealer Audits


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