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PCAOB Highlights 2016 Broker-Dealer Audit Inspection Findings

Jul 21st 2017
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Deficiencies in financial statement audits and compromised auditor independence are among the many problems revealed in a staff inspection brief previewing the results of the Public Company Accounting Oversight Board’s (PCAOB) 2016 inspections of auditors of brokers and dealers.

PCAOB staff inspected 75 firms covering portions of 115 audits and related attestation engagements during the period of June 30, 2015 through June 30, 2016.

The inspections are intended to assess audit firms’ compliance with professional standards, US Securities and Exchange Commission (SEC) and PCAOB rules, and the Sarbanes-Oxley Act.

Here are the key takeaways from the nine audit areas that were examined:

1. Auditor independence. As in past years, inspectors found instances in which auditors appeared to violate the independence criteria of the PCAOB and the SEC by preparing the financial statements or performing bookkeeping and other prohibited services related to the accounting records of broker-dealer clients.

2. Financial statement audit deficiencies. Also similar to findings observed in previous years, inspectors noticed several deficiencies in financial statement audits. Deficiencies were found in the following areas:

Financial statement presentation and disclosures
Fair value measurements
• Assessment and response to risks of material misstatement due to fraud

3. Related-party transactions. Inspectors found that auditors didn’t perform sufficient risk assessment procedures to obtain an understanding of relationships and transactions with related parties. As with the 2015 inspection findings, staff also observed that auditors identified related parties or material related party transactions but didn’t perform sufficient procedures to test the transactions.

4. Supplemental information. Annual reports of brokers and dealers are required to include supporting schedules, including the computation of net capital, the computation for the determination of the required reserve, and information concerning the possession or control of customer securities.

Deficiencies were found in procedures performed on the components of the net capital computation supporting schedule and in the supporting schedules required by the SEC Customer Protection Rule.

5. Auditor’s reporting on the financial statements and supporting schedules. Inspectors found that auditor’s reports omitted at least one of the required elements.

They also observed instances when the date of the auditor’s report was prior to the date on which the auditor concluded that sufficient, appropriate audit evidence had been obtained to support the opinion expressed in the report.

6. Attestation engagements. Inspectors observed several deficiencies, including instances in which the auditor didn’t sufficiently test controls over compliance with the financial responsibility rules and auditors who didn’t perform required procedures on the schedules the broker or dealer used to determine compliance.

7. Engagement quality reviews. When done correctly, engagement quality reviews serve as protection against insufficiently supported audit opinions or inappropriate conclusions in attestation reports. Inspectors found occurrences where engagement quality reviews were not performed prior to the audit and review reports being issued.

In many engagements, inspectors found that the engagement quality reviewer didn’t adequately evaluate the significant judgments and conclusions reached by the engagement team.

8. Audit documentation. Inspectors found that audits or related attestation engagements were done without an engagement completion document. The documents also were prepared in some cases without describing what auditors did to address significant audit findings.

9. Independence communications. Auditors failed to make the required written communications to the audit committee of their broker or dealer audit clients about certain matters prior to accepting an initial engagement and at least on an annual basis.

The full report on the 2016 inspection results will be issued in August.

Related articles:

Broker-Dealer Audit Deficiencies ‘Continue at a High Level,’ PCAOB Says
PCAOB Details 2017 Broker-Dealer Audit Inspection Areas


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