7 reasons for deficiencies in audits of broker-dealer annual reports

Inexperience with PCAOB standards is a significant reason for an “unacceptably high” rate of noncompliant audits of broker-dealers annual reports, according to a report focused on helping auditors get it right.

The PCAOB found deficiencies in 73% of broker-dealer engagements performed by audit firms that audited fewer than 100 broker-dealers in 2022, according to Spotlight: Insights Into the PCAOB’s Interim Inspection Program Related to Audits of Broker-Dealers.

“Inspection staff continues to observe audit firms with personnel that may not have the technical competence or experience to perform the procedures required to comply with PCAOB standards,” the report stated.

In an effort to help straighten out the learning curve related to performing audits of the annual reports of SEC-registered broker-dealers, the report details the impact that inexperience and six other factors can have and suggests related actions. Those factors include:

• Insufficient understanding of the broker-dealer industry;
• Lack of professional skepticism;
• Lack of rigor in risk assessment and internal control;
• Ineffective engagement quality review;
• Overreliance on standardized audit programs; and
• Low-cost providers and the pace of auditor changes.

Beyond the advice in the report, the PCAOB recommends that those seeking proficiency in performing compliant engagements read the board’s audit and attestation standards and rules and the board’s most recent Annual Report on the Interim Inspection Program Related to Audits of Brokers-Dealers.

“Training of audit personnel in the broker-dealer industry is crucial to performing a quality audit,” according to the spotlight report. “An audit of a broker-dealer requires that engagement teams be technically proficient with the Broker-Dealer Financial Responsibility Rules, particularly the Net Capital Rule and the Customer Protection Rule, and in the application of PCAOB standards. It may take time and multiple engagements for an auditor to become technically proficient in these areas, and this result is usually achieved through on-the-job training, in-house and vendor training sessions, broker-dealer conferences, and dedicated self-study.”

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.