PCAOB calls for more care in audits of brokers and dealers

BY KEN TYSIAC

The PCAOB is urging auditors of broker-dealers to conduct audits with due professional care and skepticism after PCAOB inspectors identified deficiencies in 57 of the 60 audits of broker-dealers reviewed during the final 10 months of 2012.

A report on the PCAOB’s interim inspection program for broker-dealer audits, which was released Monday, said board inspectors reviewed portions of a total of 60 audits conducted by 43 public accounting firms. The inspections staff found that auditors were involved in the preparation of the financial statements they audited in 22 of the 60 audits examined, contrary to SEC independence rules.

These independence findings were identified in about 8% of the audits performed by firms that also audit public companies, but were found in about 80% of the audits performed by firms that audit brokers and dealers but not public companies.

Deficiencies were most commonly reported with respect to:

  • Audit procedures related to net capital and customer reserve supporting schedules, compliance with the conditions of the exemption claimed by the broker or dealer, and the accountant’s supplemental report on material inadequacies.
  • Audit procedures regarding tests of revenue, related parties, and the consideration of fraud in the audit of the financial statements.


The PCAOB urged firms that audit brokers and dealers to read its report and take action to prevent deficiencies. Firms were encouraged to review:

  • Arrangements with brokers and dealers, and quality-control procedures, for the purpose of upholding SEC independence rules.
  • Guidance and training to determine whether appropriate attention is being given to areas where PCAOB inspectors found deficiencies.
  • Policies for supervision and review to help ensure that firm partners and supervisors are paying sufficient attention to these areas.


Broker and dealer management and audit committees—or their equivalent—may want to inquire with their auditors about how audits are addressing these areas, the PCAOB suggested.

The board will continue to conduct inspections of firms that audit brokers and dealers under the interim program until rules for a permanent inspection program take effect. A rule proposal for a permanent inspection program is expected in 2014 at the earliest.

Auditors of brokers and dealers, meanwhile, have a change on the horizon with respect to the standards they follow. Beginning with audits effective for fiscal years ending on or after June 1, 2014, audits of broker and dealers will be conducted in accordance with PCAOB standards. Audits for fiscal years prior to that date have been conducted in accordance with GAAS.

The PCAOB also announced that it will hold forums on auditing smaller broker-dealers on Oct. 31 in Jersey City, N.J., and on Nov. 20 in Las Vegas. More information is available on the PCAOB’s website.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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