PCAOB OKs Temporary Rule to Govern Broker-Dealer Audits

Editor's note: The SEC on Wednesday unanimously proposed amendments to the broker-dealer financial reporting rule designed to strengthen audits of broker-dealers and the SEC’s oversight of the way broker-dealers handle their customers’ securities and cash. For details and a video, go to http://www.sec.gov/news/press/2011/2011-128.htm.


The PCAOB on Tuesday adopted a temporary rule to establish an interim inspection program for registered public accounting firms’ audits of securities brokers and dealers as permitted by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The board adopted without material change a proposed temporary rule issued Dec. 14, 2010. The board said in its press release that it will continue to consider the scope and other elements of a permanent inspection program.


While the rule was sweeping in its scope, covering all auditors of all broker-dealers, the AICPA had written to the PCAOB during the comment period, arguing that the PCAOB should consider a more targeted rule, focusing on the auditors of clearing, carrying and custodial broker-dealers. Those broker-dealers have direct access to investor funds, and the AICPA explained that this was where the greatest benefit to investors would be. In contrast, introducing broker-dealers are prohibited from taking investor funds, and the AICPA argued that more study was needed as to how regulation of the auditors of those broker-dealers would benefit investors. The eight CPAs in the House of Representatives as well as House Financial Services Committee Chairman Spencer Bachus, R-Ala., and House Capital Markets Subcommittee Chairman Scott Garrett, R-N.J., wrote similar letters to the PCAOB, contending that there was insufficient support for an interim rule covering auditors of introducing broker-dealers.


The board expects to post the final rules and amendments by Wednesday on the board’s website .


The inspection program will be funded by an accounting support fee paid by brokers and dealers with more than $5 million in tentative net capital. The board said it anticipates that the rules will be in effect for its 2011 funding cycle for brokers and dealers, which begins in the fall.


The board also amended its funding rules for issuers. The amendments, among other things, increase the market capitalization threshold for equity issuers from $25 million to $75 million and investment company issuers from $250 million to $500 million and revise the basis for calculating an issuer’s market capitalization to include the market capitalization of all classes of an issuers’ voting and nonvoting common equity rather than just its common stock. The board said it anticipates that the rules related to the accounting support fee for issuers will become effective for its 2012 funding cycle for issuers.


The PCAOB released a fact sheet Dec. 14, 2010, outlining its proposed funding rules.


The board said that 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 by 2013.


The board said it will provide public reports on the progress of the interim program and significant issues identified, but absent unusual circumstances, it will not issue firm-specific inspection reports before inspection work is performed under the permanent program and will not issue firm-specific inspection reports on any firms that are eventually excluded from the scope of the permanent program.


The temporary rule changes nothing about the rules or standards that govern audits of brokers and dealers. As the SEC has previously explained, the rules continue to require those audits to be carried out under generally accepted auditing standards (GAAS).


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