AICPA Alert for Auditors of Nonpublic Broker-Dealers


Editor’s note: This alert was compiled by Teighlor S. March, J.D., Senior Manager, Legal, Legislative & Regulatory Affairs for the AICPA.

On July 15, 2010, a PCAOB Standing Advisory Group meeting was held in Washington, D.C., to discuss various current topics, including the issue of PCAOB oversight and inspection over auditors of nonpublic broker-dealers. The Standing Advisory Group (“SAG”) exists to advise the PCAOB on the development of auditing and related professional practice standards. Chaired by the PCAOB’s Chief Auditor and Director of Professional Standards, membership is comprised of auditors, investors, public company executives and others.

For background purposes, the SEC’s exemption permitting nonpublic broker dealer firms to have their financial statements audited by independent public accounting firms not registered with the PCAOB expired on Dec. 31, 2008. The SEC’s exemption was initially by order issued Aug. 4, 2003, and subsequently extended three times. The extension, issued as a result of amendments to §17(e)(1)(A) of the Securities Exchange Act of 1934 by the Sarbanes-Oxley Act, was based on the fact that application of registration requirements and procedures to auditors of nonpublic broker-dealers was still being considered.

However, prior to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), Sarbanes-Oxley did not subject the audits for these nonpublic broker-dealers to the PCAOB’s standard-setting, inspections, investigatory or disciplinary authority. Under Section 982 of the Dodd-Frank Act, which was signed by President Barack Obama on July 21, the PCAOB is now empowered with the authority, by rule, to require a program of inspection for auditors of the financial statements of all broker-dealers–public and nonpublic (as defined in §§3(a)(4) & (5) of the ’34 Exchange Act) who are registered with the PCAOB. However, the Dodd-Frank Act permits the PCAOB, in its inspection rule, to differentiate among BD classes and exempt “introducing” brokers (for example, nonclearing, carrying, custodial). Additionally, PCAOB registration would be aligned with inspection such that any auditors who the PCAOB decides not to inspect would also no longer be required to register.

The AICPA’s position continues to be in support of PCAOB registration and inspection of all auditors of broker-dealers which are clearing, carrying, or custodial in nature, but does not believe inspection should be required of auditors of nonpublic introducing broker-dealers. Thus, the AICPA fully supports the promulgation of any Board rule that would differentiate among broker-dealer classes and focus regulatory resources on those broker-dealers that actually pose the greatest risk to the public. 

The PCAOB SAG meeting, held in anticipation of the Dodd-Frank Act becoming law, was a forum for PCAOB staff to elicit the SAG’s views as to certain aspects of broker-dealer audits. Specifically, the issues raised by PCAOB staff and board members–for SAG input/discussion–included:

  • Since expiration of the exemption, approximately 500 new accounting firms have registered with the PCAOB;
  • The PCAOB acknowledged that it may establish differing frequency inspection schedules of the audit firm–based on the class of broker-dealer audited–but no further details were provided on this or the specifics of this (for example, whether a registrant not subject to inspection under such a rule would be required to disclose that fact);
  • The PCAOB faces challenges to implement the Dodd-Frank Act, including the need for specialized training and additional resources/recruitment;
  • The PCAOB’s proposed budget to the SEC–to be submitted in November–will request additional resources for any new authorities;
  • Because of the time and steps involved in the promulgation of any new rules applicable to both broker-dealers and auditors of broker-dealers, 2011 is likely to be a transition year, with 2012 being the first year of implementation of new rules.

A main component of the discussion centered on the specific auditing, attestation or professional practice standards for broker-dealer audits that would need to be established by the PCAOB. The PCAOB staff’s initial observation on this point is that the PCAOB will need to develop specific auditing or attestation standards pertaining to customer assets (which are reflected in the stock record, not in a broker-dealer’s financial statements), as well as for the report on internal controls required by SEC Rule 17a-5, since no specific audit requirement pertaining to customer securities exists in the AICPA’s Auditing Standards Board (“ASB”) standards, nor is the report on internal controls specifically addressed in AICPA or PCAOB auditing standards.

The PCAOB will be in communication with the AICPA, SEC and FINRA as it pursues the need for more written guidance on the above issues. Noteworthy were SAG member observations that the greatest risk remains with those broker-dealers who have custody, and that the stock record is where additional scrutiny should be focused (as opposed to the financial statements).

The AICPA will communicate future developments to members once they become available.  To access an archived webcast of the July 15 meeting, click here . For help with any questions, please contact Rich Miller, AICPA General Counsel ( rmiller@aicpa.org ), Susan Coffey, SVP, Member Quality & State Regulation ( scoffey@aicpa.org ) or Irina Portnoy, Technical Manager–Accounting Standards Team ( iportnoy@aicpa.org ).

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