PCAOB - Report: Interim Inspection Program Related to Audits of Brokers and Dealers Finds Material Deficiences (Dodd-Frank Study)
The Public Company Accounting Oversight Board (the "PCAOB") issued a report to describe the progress and significant observations of its interim inspection program for auditors of brokers and dealers registered with the SEC. The program commenced in August 2011 in response to the PCAOB's new authority with respect to inspections, standards setting, investigations, and disciplinary proceedings over auditors of brokers and dealers as provided in the Dodd-Frank Act. The audits inspected were required to be conducted under generally accepted auditing standards ("GAAS") issued by the American Institute of Certified Public Accountants ("AICPA").
[Lofchie comment: Note that the study was of the quality of audit procedures, not of the quality of the financial reporting of the broker-dealers that were being audited. Further, it appears that the majority of the audits were of small broker-dealers, given that the majority of them did not hold customer assets.]
The examinations found what seemed to be significant and material deficiencies in the quality of virtually every audit, including in relation to the computation of capital, the right of each broker-dealer being audited to claim an exemption from the customer protection rule, the existence of related party transactions, revenue recognition procedures and the existence of control deficiencies.
[Lofchie Comment: In light of the report, it would seem clear there will be significant regulatory pressure on audit firms to step up the rigor of their procedures. While the report does not focus on broker-dealers directly, it seems inevitable that any such pressure on audit firms will result in significant pressure on broker-dealers to make corresponding improvements to their procedures. Further, these findings as to broker-dealer audits must also be viewed in light of the recent failure of Peregrine, in which no had caught that the firm had been engaged in a long-running fraud. Notwithstanding that Peregrine was an FCM, not a broker-dealer, there is a common theme. The significance for broker-dealers (and FCMs) is clear: more focus on the back office, both in terms of largely objective measures (e.g., computation of net capital) and also of somewhat subjective measures (e.g. control functions and procedures). See, e.g., the statement of CFTC Chairman Gensler in regard to Peregrine.]
Cross Reference(s): Dodd-Frank Section 982.
View study here (links externally to PCAOB website).See also: Cabinet Dodd-Frank Studies page.