PCAOB Reports Auditors and Broker Dealers are Too Close for Comfort

The Public Company Accounting Oversight Board (“PCAOB”) has issued its second report regarding auditors of brokers and dealers registered with the Securities and Exchange Commission (“SEC”). This report relates to inspections of 60 audits conducted by 43 firms, which the PCAOB performed from March 1, 2012 to December 31, 2012.

The overall result was dismal, and as follows:

  •  In contrast to SEC independence rules, auditors were involved in the preparation of the financial statements that they audited in 22 of the 60 audits selected
  • There were audit deficiencies in 57 of the 60 audits, most frequently related 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. Deficiencies in at least one of these areas were noted in more than one-third of the audits selected for inspection.
    • Audit procedures regarding tests of revenue, related parties, and the consideration of fraud in the audit of the financial statements. Deficiencies in at least one of these areas were noted in more than one-third of the audits selected for inspection.

The PCAOB encourages registered public accounting firms that audit brokers and dealers

  • to continually stress to their personnel the critical need to conduct audits with due professional care, including professional skepticism.
  • to take action to help prevent the types of deficiencies and findings identified in this report from occurring in the future by reviewing the following:
    • Arrangements with brokers and dealers and quality control procedures to help ensure that SEC independence rules are not violated;
    • Guidance and training to determine whether the topics noted as observed audit deficiencies identified in the report are given appropriate attention; and
    • Policies for supervision and review to help ensure their partners and supervisory personnel are placing appropriate attention on these areas.

The PCAOB further recommends that management and audit committees, or the equivalent, of brokers and
dealers may want to consider inquiring of their auditor about how these areas are being appropriately addressed in the audit.


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