Senators reintroduce bill to roll back audit requirements for small broker-dealers

Three senators have reintroduced a bill that would exempt small broker-dealers from the expanded audit requirements of the Dodd-Frank Act of 2010 and reinstate looser auditing requirements.

Sen. Tom Cotton, R-Ark., Thom Tillis, R-N.C., Doug Jones, D-Ala., and Kyrsten Sinema, D-Ariz., reintroduced the Small Business Audit Correction Act last week to give regulatory relief to small investment brokers, exempting them from hiring a PCAOB-registered audit firm to conduct rigorous audits of their internal controls. The bill was originally introduced in the previous congressional term, and last year a similar version passed the House Financial Services Committee with bipartisan support.

"Requiring our small non-custodial broker-dealers to get the same audits required of public companies only results in higher costs and fewer small firms, and all because of a provision that wasn't even supposed to be aimed at non-custodial firms,” Cotton said in a statement. “This bill will return audit requirements to the former standard, one appropriate for these kinds of firms and which will allow our small broker-dealers to expand and help create more jobs.”

Senator Tom Cotton, a Republican from Arkansas
Senator Tom Cotton, a Republican from Arkansas, questions witnesses during a Senate Intelligence Committee hearing.

The Dodd-Frank Act of 2010 added the stiffer requirements in the wake of the financial crisis and after scandals involving firms like Bernard L. Madoff Investment Securities, whose multibillion-dollar Ponzi scheme escaped detection for years because the two-person accounting firm listed as his auditor didn’t really audit his firm’s fictitious financial statements. The Dodd-Frank Act gave the Public Company Accounting Oversight Board expanded oversight of the auditors of brokers and dealers registered with the Securities and Exchange Commission, giving the PCAOB registration, inspection, standard-setting and disciplinary authority over auditors of broker-dealers. The Dodd-Frank Act requires all investment brokers and dealers, irrespective of size, to hire a PCAOB-registered audit firm to conduct audits.

The Small Business Audit Correction Act would exempt privately held, small non-custodial brokers and dealers in good standing from the requirement to hire a PCAOB-registered audit firm to meet their annual SEA Rule 17a-5 reporting obligation and would instead reinstate the previous regulatory audit requirements.

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