PCAOB Says Deficient Audits on Broker-Dealers "Unacceptably High"

The PCAOB found that there is a need for significant improvement in the quality of broker-dealer "audits and attestation engagements." PCAOB staff found that the "overall deficiency rates in broker-dealer engagements remain unacceptably high."

In an analysis of a PCAOB interim inspection program related to the audits of broker-dealers, PCAOB staff drew several insights as to these deficiencies. Among the findings, PCAOB found an (i) insufficient understanding of the broker-dealer industry, (ii) a lack of professional skepticism, (iii) a lack of rigor in risk assessment and consideration of internal controls, (iv) inexperience with PCAOB standards, (v) ineffective engagement quality review and (vi) an overreliance on standardized audit programs.

Staff found that audit firms who examined less than 100 broker-dealers had a 73% failure rate as compared to a 64% failure rate for auditors who examined more than 100 broker-dealers. Less experienced auditors reviewing smaller firms were found to have a somewhat higher rate of problems than auditors with significant broker-dealer experience.

The PCAOB identified a number of different reasons why it believed broker-dealer audits were insufficient including, a lack of familiarity with the relevant SEC rules (particularly the net capital rule and the customer protection rule), poor knowledge of broker-dealer business models and insufficient verification. PCAOB stated that in many situations an auditor can not fulfill its responsibilities just by reviewing the book of the broker-dealer; the auditor must, when reviewing an introducing firm, also confirm information with the relevant clearing firm. In addition, the PCAOB said that auditors are not giving sufficient attention to the assessment of broker-dealers' internal controls.