The new standards are part of an effort to protect customer funds by enhancing the quality of compliance information provided to the Securities and Exchange Commission and used in its regulatory oversight of broker-dealers. They come in response to recent scandals at a number of financial services firms, such as MF Global, Peregrine Financial Group and Bernard L. Madoff Securities, where lax auditing and financial chicanery allowed customer funds to be misappropriated.
The auditing standard adopted by the PCAOB on Thursday is applicable when auditors are engaged to perform audit procedures and report on supplemental information that broker-dealers and others file with the SEC. In addition, the PCAOB adopted related amendments to other PCAOB standards. The Dodd-Frank Act of 2010 included provisions enabling the PCAOB to inspect audits of certain types of broker-dealers that hold customer funds in the wake of the Madoff scandal.
“The standards adopted today are an important step for the Board’s oversight of audits of broker-dealers authorized under the Dodd-Frank Act,” said PCAOB chairman James R. Doty in a statement. “They will strengthen procedures for auditors and improve the reliability of annual reports required by the SEC for oversight of customer assets held by broker-dealers.”
The two attestation standards cover the auditor's examination of compliance reports and the auditor’s review of exemption reports. The requirements for broker-dealers to prepare compliance or exemption reports, and for PCAOB-registered auditors to examine or review such reports, are new requirements included in the SEC’s recent amendments to Exchange Act Rule 17a-5. The compliance and exemption reports contain statements made by broker-dealers regarding compliance with key SEC financial responsibility rules, including those involving the safekeeping of customer assets or with applicable conditions for exemption.
Consistent with the requirements of Rule 17a-5, the attestation standards establish requirements for auditors examining certain statements in broker-dealer compliance reports and reviewing statements in broker-dealer exemption reports.
The supplemental information standard establishes the auditor's responsibilities when engaged to perform audit procedures and report on supplemental information that accompanies the audited financial statements. Supplemental information includes the supporting schedules that broker-dealers are required to file with the SEC.
The PCAOB initially proposed the attestation standards and auditing standard for supplemental information on July 12, 2011.The PCAOB adopted these standards after consideration of comments received on the proposal and as a result of amendments made to Rule 17a-5 that were adopted by the SEC on July 30, 2013.
“Both attestation standards emphasize coordination between the examination or review engagement, the audit of the broker-dealer's financial statements and audit procedures performed on the supplemental information,” said PCAOB chief auditor and director of professional standards Martin F. Baumann. “This emphasis on coordination can promote overall audit effectiveness and avoid redundancy in the work performed.”
The American Institute of CPAs reacted cautiously to the new standards. “The AICPA is committed to activities that enhance audit quality and has been a leader assisting practitioners in achieving that goal,” said AICPA president and CEO Barry Melancon in a statement. “We have been consistent in our position that brokers and dealers should be subject to SEC regulation and that auditors of those brokers and dealers that carry, clear or have custody of customer funds should be subject to the PCAOB's standards, inspections and enforcement programs. The PCAOB's interim inspection program, established to determine the appropriate scope of regulation under the Dodd-Frank Act, will provide insight into which auditors should be subject to the full regulation of the PCAOB. We believe it is critical that the PCAOB use risk analysis in determining which audits of broker-dealers should be included in a permanent inspection program. We urge the board to act expeditiously in determining the scope of that program.”
The Dodd-Frank Act amended the Sarbanes-Oxley Act to authorize the PCAOB to oversee the audits of brokers and dealers registered with the SEC. On July 30, 2013, the SEC amended its Rule 17a-5 to require, in part, that audits of broker-dealers' financial statements and supplemental information, as well as the auditor's examination of the compliance report or the auditor’s review of the exemption report, be conducted in accordance with PCAOB standards.
Before the SEC amendments to Rule 17a-5, audits of brokers and dealers were required to be performed under generally accepted auditing standards established by the AICPA. Auditing Standard No. 17, Auditing Supplemental Information Accompanying Audited Financial Statements, supersedes the Board's interim auditing standard, AU sec. 551, Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Document.
All new standards and amendments to other PCAOB standards adopted by the Board are submitted to the SEC for approval. The new attestation standards, Examination Engagements Regarding Compliance Reports of Brokers and Dealers and Review Engagements Regarding Exemption Reports of Brokers and Dealers, and related amendments will be effective, subject to approval by the SEC, for examination engagements and review engagements of fiscal years ending on or after June 1, 2014.
AS No. 17 and related amendments, if approved by the SEC, will be effective for reports on supplemental information that accompanies financial statements for fiscal years ending on or after June 1, 2014. This effective date for the standards coincides with the effective date for the corresponding annual reporting requirements for broker-dealers under the SEC amendments to Rule 17a-5.
The final rules and board member statements from the open meeting will be available on the PCAOB’s Web site under Rulemaking Docket No. 035 for the new attestation standards and Rulemaking Docket No. 036 for the new auditing standard for supplemental information, along with an archive of the webcast and a podcast of the board meeting.
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