PCAOB Initial Inspections of Smaller Broker Dealers Uncover Significant Audit Failures

The Public Company Accounting Oversight Board (PCAOB) released its first report on the progress of the interim inspection program for auditors of brokers and dealers. The inspection program was implemented approximately a year ago in response to new oversight authority given to the PCAOB by the Dodd-Frank Wall Street Reform and Consumer Protection Act. In this first report, the PCAOB reviewed ten audit firms covering 23 brokers and dealers registered with the Securities and Exchange Commission. Shockingly, the PCAOB identified deficiencies in all of the audits inspected.

We provide additional information regarding these inspections and the results in this article. Most of the audits were of smaller firms whose auditors are not otherwise subject to PCAOB inspection. For investors who have securities held by these small brokerage firms, the concern should be substantial.

The enormous Madoff scandal was facilitated by a solo “auditor” who has since pled guilty to multiple criminal charges. The more recent Peregrine Financial scandal involved thefts from customer accounts to support Peregrine’s own risky trading, with fraudulent records prepared to cover the fraud. Like Madoff, Peregrine Financial was “audited” by a solo shop.

If your securities are held at a small broker dealer audited by a firm that has never been inspected, it may not be prudent to allow your securities to remain at that broker. Consider transferring your holdings to a larger broker/dealer that is audited by one of the substantial audit firms who have already been subject to recurring PCAOB inspections and related reports.


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