Auditors of brokers and dealers inspected in 2013 had a continued
high number of independence findings and audit deficiencies, the Public Company
Accounting Oversight Board reported today.
Although the percentage of audits with inspection
observations was slightly lower than in previous inspections, the Board
expressed concern over the nature and number of these continuing observations.
In its third progress report on the interim
inspection program for auditors of broker-dealers registered with the
Securities and Exchange Commission, the PCAOB identified audit deficiencies or independence
findings in 56 of the 60 audit firms inspected, and in 71 of the 90 audits
Audit deficiencies were found in portions of 70 of the 90
audits. Independence findings were found
in 21 on the 90 audits, where firms helped with the bookkeeping or preparation
of the financial statements they audited, contrary to SEC rules.
The most frequent audit deficiencies were noted in financial
statement audit areas, including auditing revenue recognition, the auditor's
response to the risk of material misstatement due to fraud, and audit
procedures to rely on records and reports from service organizations, as well
as areas specific to the audits of broker-dealers, including auditing the net
capital computation and the audit work performed for the auditor's report on
"Many of the observations noted during 2013 have not changed
from prior inspections and relate to fundamental auditing principles," said
Robert Maday, Deputy Director of the Division of Registration and
Inspections and Program Leader of the Broker-Dealer Firm Inspections
"We again urge firms that audit broker-dealers to re-examine
their audit approaches and we remind firms that independence rules applicable
to broker-dealer audits prohibit bookkeeping or financial statement preparation
by the auditor," he added.
Observations Since the Start of the Interim Program
Audit deficiencies or independence findings were identified
in portions of 151 of the 173 audits selected for inspection (87
percent), since the start of the interim program. The 22 audits without
observations came from 12 firms, of which 11 also audited public companies.
Independence findings were found in 45 of the 173 audits selected
for inspection (26 percent). Inspection staff noted a significant
portion of these findings, 89 percent, came from the firms that
did not audit public companies.
inspectors saw a high percentage of observations across the firms inspected, whether
or not the firm audited public companies, and regardless of how many broker-dealer
audits were performed by the firm. The
results also were high across the broker-dealer audits selected, regardless of the
broker-dealer's reported net capital, revenues and assets, or whether it claimed
to be exempt from the customer protection rule.
Of particular note, observations were identified in 100
percent of audits selected for inspection for auditors with only one
broker-dealer audit client, while the percentage was only slightly lower (92
percent) for firms that audited two to 100 broker-dealers, but even lower (63
percent) for firms that audited more than 100 broker-dealers.
In addition, firms that also audited public companies had a
lower percentage of audits with observations (78 percent) than firms that did
not (99 percent).
Generally, there did not appear to be a discernible trend between
the percentage of inspection observations and broker-dealer characteristics,
other than a lower percentage of findings for audits of broker-dealers that did
not claim to be exempt from the customer protection rule (79 percent) compared
to those that did (90 percent).
The Board noted that the firms and audits inspected, and the
observations made, are not necessarily indicative of the total populations of
firms and of broker-dealer audits.
Next Inspections and
Permanent Inspection Program
Inspections are well underway for 2014. The report notes
that the Board plans to inspect approximately 60 audit firms covering portions
of about 100 audits. These inspections include firms and audits where
observations were found in previous inspections; inspectors also will evaluate whether, or how, firms
addressed audit deficiencies or independence findings.
During 2015, the Board will continue its interim inspection
program. Audits selected for these inspections will have fiscal years ending on
or after June 1, 2014, and therefore be required to adhere to PCAOB standards.
The Board is taking a careful and informed approach in
developing the scope of a permanent inspection program. The Board continues to evaluate the risk of
loss to customers of broker-dealers and, in this regard, plans to review new broker-dealer
compliance and exemption reports and the respective auditors' reports.
The Board anticipates issuing a proposal for a permanent
inspection program in 2016, which will include a consideration of whether to
exempt any category of registered firms from the program.
The Board has a number of initiatives for broker-dealer
auditors, including its Forums on Auditing Smaller Broker-Dealers. The Board also recently issued Staff Guidance for Auditors of SEC-Registered Brokers and Dealers.
Auditors are reminded that information
obtained through inspections may lead to PCAOB investigations or disciplinary
proceedings, or referral by the Board to the SEC and other regulators.
The interim inspection program was established in August
2011 in response to the Board's new oversight responsibility over auditors of
SEC-registered broker-dealers authorized by the Dodd-Frank Wall Street Reform
and Consumer Protection Act.
The Board issued its first progress report
in August 2012,
and its second progress report in August 2013. A fact sheet on the third progress
report is also available.