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PCAOB Proposes Interim Program for Inspection of Broker-Dealer Audits

 

DECEMBER 15, 2010

The PCAOB on Tuesday proposed for public comment a temporary rule to establish an interim inspection program for registered public accounting firms’ audits of brokers and dealers, while the board considers the scope and other elements of a permanent inspection program, consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act. The board also proposed rules related to assessing and collecting a portion of its accounting support fee from brokers and dealers to fund PCAOB oversight of the audits. Certain amendments to existing funding rules for issuers were also proposed for public comment.

Comments on the proposals are due Feb. 15, 2011.

“The board’s actions … are first steps … to creating a robust oversight program for accounting firms that audit securities brokers and dealers,” said PCAOB Acting Chairman Daniel L. Goelzer in a press release announcing the proposals. “In particular, the proposed interim inspection program would provide the board with insight about how to maximize the benefits of broker-dealer inspections to the investing public in an effective and efficient manner.”

Under the temporary rule, the board would begin to inspect auditors of brokers and dealers and identify and address with the registered firms any significant issues in those audits. The board said in its press release that it expects insights gained through the interim program will inform the eventual determination of the scope and elements of a permanent program. The board said it expects to propose rules for a permanent program after no more than two years of an interim program. While the interim program is in place, the board said it would at least annually provide public reports on the program’s progress and significant issues identified, but that it would not expect to issue firm-specific inspection reports before the scope of a permanent program is set.

The proposed temporary rule says it would not change anything about the rules or standards that govern audits of broker-dealers. The PCAOB said that, as the SEC has previously explained, its rules continue to require those audits to be carried out under GAAS (generally accepted auditing standards).

The board proposed that the accounting support fee be based on “tentative net capital,” which, under the SEC’s rules, is net capital before deducting certain securities haircuts and charges for certain commodities transactions (according to SEC Rule 15c3-1(c)(15)). Because those deductions depend on types of investments and transactions the broker or dealer may elect to enter during the period, the board said tentative net capital is considered to be a more consistent measure than net capital.

The PCAOB said 4,600 brokers and dealers are registered with the Financial Industry Regulatory Authority (FINRA). Approximately 86% of FINRA brokers and dealers have tentative net capital of less than $5 million, and those 86% account for only approximately 1.1% of the industry’s total tentative net capital. The remaining 14% of brokers and dealers hold the other 98.9% of the industry’s tentative net capital, with only about 33 FINRA brokers and dealers holding approximately 80%. Therefore, the board has proposed that a class of brokers and dealers, each with tentative net capital less than $5 million, pay no portion of the accounting support fee. The board said that, under this approach, about 640 of 4,600 FINRA brokers and dealers would pay a share of the accounting support fee.

 

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