PCAOB Proposes Rules for Broker-Dealer Audits

Two years after revelations emerged of Bernard Madoff’s multibillion-dollar Ponzi scheme and only days after the suicide of Madoff’s eldest son, the Public Company Accounting Oversight Board proposed a set of rules on Tuesday to begin expanding the PCAOB’s oversight authority to encompass audits of securities brokers and dealers.

The rules would implement several provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law earlier this year.

The PCAOB has proposed for public comment a temporary rule to establish an interim inspection program for registered public accounting firms’ audits of brokers and dealers, as well as rules related to assessing and collecting a portion of its accounting support fee from brokers and dealers to fund PCAOB oversight of audits of brokers and dealers, consistent with the Dodd-Frank Act. Several amendments to existing funding rules for issuers were also proposed for public comment.

“The board’s actions today lay the groundwork for our oversight of registered public accounting firms audits’ of brokers and dealers,” said PCAOB acting chairman Daniel L. Goelzer in a statement.

The Dodd-Frank Act authorized the PCAOB to establish, by rulemaking, a program for inspecting auditors of brokers and dealers. The law leaves to the board, subject to the approval of the Securities and Exchange Commission, important questions concerning the scope of the program and the frequency of inspections, including whether to differentiate among categories of brokers and dealers and whether to exclude from the inspection program any categories of auditors.

The temporary rule proposed by the PCAOB would, if adopted, put in place an interim inspection program while the board considers the scope and other elements of a permanent inspection program. Under the temporary rule, the PCAOB would begin to inspect auditors of brokers and dealers, and identify and address with the registered firms any significant issues it uncovers in those audits.

The PCAOB said it expects that the insights gained through the interim program will help determine the ultimate scope and elements of a permanent program. The board anticipates it will propose rules for a permanent program within two years of starting the interim program.
During that time, the PCAOB plans to provide, on at least an annual basis, public reports on the progress of the interim program and the significant issues it identifies. However, the board does not expect to issue firm-specific inspection reports before it establishes the scope of the permanent program.

The proposed temporary rule would not change any of the existing rules or standards governing audits of broker-dealers, the PCAOB noted. The SEC has previously stated that its rules continue to require those audits to be carried out under generally accepted auditing standards.
Comments are due to the PCAOB no later than Feb. 15, 2011.