PCAOB Finds Problems at Nearly All Auditors of Broker-Dealers

The Public Company Accounting Oversight Board identified deficiencies at 96 percent of the firms that audit broker-dealers, according to a new report Thursday.

The PCAOB’s annual report on its interim inspection program for auditors of brokers and dealers details the results of inspections that the board conducted last year, the first inspection year in which all inspected engagements were governed by new rules from the Securities and Exchange Commission. A fact sheet is also available.

The SEC’s 2013 amendments to Exchange Act Rule 17a-5 include a new requirement that broker-dealer audits be performed in accordance with PCAOB standards. However, the report indicates high levels of deficiencies, no better than PCAOB inspection results in previous years.

At 96 percent of the audit firms inspected, the PCAOB found deficiencies. The main improvement appeared to be in the area of auditor independence, which seemed to be impaired in 7 percent of the inspected audits in 2015, compared to 25 percent in 2014. On the other hand, many audit firms continue to help their broker-dealer clients with bookkeeping and preparing financial statements.

“While there were fewer independence findings, it is very troubling that we continue to find auditors assisting in the preparation of the financial statements they audit or providing bookkeeping services to their audit clients,” said Robert Maday, deputy director of PCAOB Registration and Inspections and leader of the Broker-Dealer Audit Firm Inspection Program, in a statement. “Auditor independence continues to be a focus of our inspections.”

The annual report, the fifth that the PCAOB has issued for the interim broker-dealer auditor inspection program, covers inspections of 75 firms and portions of 115 audits and the related attestation engagements. The Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 gave the PCAOB expanded oversight of the audits of brokers and dealers registered with the SEC to include inspections, enforcement and standard-setting authority of their auditors.

However, there were some encouraging signs. PCAOB inspectors found deficiencies in 77 percent of the audits covered by the inspections during 2015, down from 87 percent in 2014.

Deficiencies in auditing revenue were identified in 70 percent of the audits, and deficiencies in auditing fair value measurements were identified in 44 percent of the audits where this audit area was reviewed.

The 2015 inspections also included the auditors’ examinations of broker-dealers’ compliance reports and reviews of broker-dealers’ exemption reports. PCAOB inspectors identified deficiencies in 78 percent of the examinations of compliance reports and in 34 percent of the reviews of exemption reports.

The identified deficiencies in audits, examinations and reviews included deficiencies in the related engagement quality review for 57 percent of the audits, 48 percent of the examinations, and 34 percent of the reviews. In seven instances, PCAOB inspectors discovered the auditor had not gotten any EQR for either the audit or the related review, which is a new requirement.

The report also includes inspection results since the beginning of the interim inspection program for auditors of broker-dealers, which started in 2011.

The PCAOB staff is now working on developing a rule proposal for the board to consider establishing a permanent inspection program for auditors of broker-dealers.

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