PCAOB finds high deficiencies for broker-dealer auditors

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The Public Company Accounting Oversight Board released a report Monday on its inspections last year of auditors of brokers and dealers, indicating a continuing high number of audit deficiencies overall, albeit with fewer independence violations than in previous years.

The PCAOB inspected 75 audit firms and reviewed portions of 116 audits last year, along with the related attestation engagements. It found deficiencies at 68 of the 75 firms inspected, or 91 percent, last year, although that was down from 97 percent in 2016. Many of the deficiencies were fundamental to conducting audits, examinations or reviews. The most common problems occurred when auditing revenue, assessing and responding to risks of material misstatement due to fraud, and auditing supplemental information for the customer protection rule.

The PCAOB also saw deficiencies in audit firm quality control systems in areas such as performing engagement quality reviews and exercising professional care.

On the other hand, the PCAOB is seeing fewer independence violations. The PCAOB inspections staff identified independence problems in four of the 48 audits inspected in 2017, or 8 percent, compared to 11 out of 115 audits, or 10 percent, in 2016.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave the PCAOB expanded authority to inspect audits of broker-dealers in an effort to prevent problems like those that led to Ponzi schemes such as at Bernard Madoff's firm. Madoff's accounting firm had done virtually no audits for years before his long-running Ponzi scheme was exposed. The PCAOB issues an annual report on audits of broker-dealers and typically finds higher rates of audit deficiencies than in audits of public companies, although there have been some signs of improvement in recent years.

The report recommended that broker-dealers and their audit committees should discuss the results of the report with their auditors so they will take action to avoid further deficiencies. Auditors should also read the annual report to better understand the areas where PCAOB inspectors found deficiencies, and evaluate their programs and procedures to prevent similar deficiencies and improve audit quality. A copy of the report is available here, along with executive highlights, plus additional information for auditors of broker-dealers on the PCAOB website.

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