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PCAOB Previews 2015 Broker-Dealer Audit Inspections

Apr 20th 2016
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In a staff inspection brief released on April 19, the Public Company Accounting Oversight Board (PCAOB) said its inspectors found fewer independence impairments of auditors of broker-dealers in 2015 than in previous years.

However, PCAOB inspectors still noticed instances in which auditors were involved in the preparation of the financial statements or accounting records of their audit clients.

The brief previews the results of 2015 inspections of auditors of broker-dealers registered with the US Securities and Exchange Commission (SEC). Reviews of broker-dealer audits are conducted under the PCAOB’s interim inspection program, which was implemented in 2011, and will continue until rules for a permanent inspection program take effect. PCAOB staff is expected to present the board with a proposal for a permanent program later this year.

The 2015 inspections of auditors of broker-dealers will be covered in more detail in a report the PCAOB is expected to issue in August.

2015 marked the first year that inspections of broker-dealer audits were conducted under PCAOB standards.

The PCAOB inspected 75 firms – a 14 percent increase from 2014 – that covered 115 audit and attestation engagements for fiscal years ending from June 1, 2014, through June 30, 2015.

PCAOB inspectors focused on and identified deficiencies in the following areas:

  • Auditor independence.
  • Financial statement audit areas for which audit deficiencies were identified in past inspections, including revenue recognition and use of information produced by brokers or dealers or service organizations.
  • Audit procedures on the supplemental schedules to the financial statements.
  • The examination of compliance reports and the review of exemption reports under PCAOB standards.
  • The engagement quality review.

According to the brief, inspections staff continued to observe deficiencies in financial statement audit areas similar in nature to the deficiencies observed in the past. These deficiencies related to audit procedures over revenue recognition, financial statement presentation and disclosures, and the risks of material misstatement due to fraud.

“An auditor is not independent of its clients, including broker or dealer clients, if the auditor maintains or prepares the client’s accounting records, prepares the client’s financial statements that are filed with the SEC, or prepares or originates source data underlying the client’s financial statements,” the brief states.

Inspectors also noted deficiencies related to:

  • The audit procedures required to be performed on the supporting schedules for the computations of net capital and the required reserve.
  • The procedures performed for the now-required attestation engagements related to the compliance and exemption reports by broker-dealers.
  • Some firms not having an engagement quality review performed for either the audit or the attestation engagement. In some cases, the engagement quality reviewer did not sufficiently evaluate the significant judgments and conclusions reached by the engagement team.

“Auditors should take note of the matters discussed in this brief in planning and performing their audit and attestation engagements,” the brief states. “It is particularly important for the engagement partner and senior engagement team members to focus on these areas and for engagement quality reviewers to keep these matters in mind when performing their engagement quality reviews.”

In 2014, inspection staff found deficiencies at each of the 66 firms inspected under the PCAOB’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.

Related articles:

PCAOB Launches Post-Implementation Review Program
Deficiencies Continue to Plague Audits of Broker-Dealers


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