PCAOB Highlights Deficiencies in Audits of BD - Affiliate Transactions
Commentary by Steven Lofchie
The PCAOB reviewed current standards and guidance for auditors of broker-dealers on the testing of financial transactions between broker-dealers and their affiliates.
The review, published as part of the PCAOB’s Broker-Dealer Audit Focus series, covered identified deficiencies and addressed recurring issues where auditors failed to adequately test the allocation of revenues and expenses between broker-dealers and related parties.
The PCAOB stated that auditors must perform specific risk assessment procedures to understand the business purpose and terms of these transactions, including verifying the accuracy of information used in allocations and evaluating whether affiliates have the financial capability to pay material balances. The PCAOB also emphasized that auditors should test the completeness and accuracy of data recorded at the parent level and confirm that allocated amounts are consistent with written expense sharing agreements.
Commentary
Firms should take this as a warning to review both their expense sharing agreements and their agreements as to how they allocate revenues and expenses on business activities that involve more than one legal entity; e.g., US and non-US firms operating globally.