Broker-dealer audit deficiencies on the rise, PCAOB finds

An annual PCAOB report details an increase in the percentage of broker-dealer financial reports with audit deficiencies and offers perspective on the nature of the deficiencies and advice for avoiding future occurrences.

According to the Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers, PCAOB staff identified at least one deficiency in 70% of the 103 audit engagements reviewed during 2023, an increase from 56% the previous year.

Fifty-nine percent of the audits performed by the four largest firms inspected (firms that audited more than 100 broker-dealers and more than 100 issuers) had at least one deficiency, below the overall percentage but an increase from 33% in 2022. Ninety percent of audits performed by firms being inspected for the first time had at least one deficiency.

The PCAOB determined that 56% of the 103 audits inspected had deficiencies related to the sufficiency or appropriateness of evidence that firms obtained to support their audit opinions. The most common area for deficiencies of that nature was revenue, followed by evaluating audit results (which primarily concerns the presentation and disclosure of broker-dealer financial statements); net capital; and related party relationships and transactions.

The report, and a companion resource (Supplementary Information Related to Audits of Brokers and Dealers) delve into a percentage increase in related attestation engagements with deficiencies.

Based on the PCAOB’s findings, the annual report offers some hypothetical scenarios that highlight good practices for avoiding deficiencies. That guidance, according to a news release, focuses on several areas where problems are persistent:

• Auditing considerations regarding use of a service auditor’s SOC 1 report to obtain evidence of the design and operating effectiveness of certain controls at a service organization;
• Testing relevant assertions for investment advisory fee revenue;
• Enhancing procedures for examining journal entries and other adjustments for evidence of possible material misstatement due to fraud; and
• Enhancing focus on required communications to the broker-dealer’s audit committee (or equivalent) and management.

Last week, the PCAOB also released a report examining the evolving integration of generative artificial intelligence in audits and financial reporting.

AICPA & CIMA RESOURCES

• Accounting guide for brokers and dealers in securities
• Expert panel on stockbrokerage and investment banking

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