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PCAOB Issues Second Progress Report on the Interim Inspection Program for Broker and Dealer Auditors

The Public Company Accounting Oversight Board today released its second progress report on its interim inspection program for auditors of brokers and dealers, covering the audit deficiencies and independence findings identified in inspections performed from March 2012 to December 2012.

For this report, PCAOB inspectors reviewed 43 audit firms covering portions of 60 audits of brokers and dealers registered with the Securities and Exchange Commission. Of the 43 audit firms inspected, 19 were subject to regular PCAOB inspection, as they also audited public companies or other issuers. The remaining 24 firms were not subject to PCAOB inspection other than under the interim inspection program.

The broker-dealer audits inspected were required to be conducted under generally accepted auditing standards issued by the American Institute of Certified Public Accountants, and not under PCAOB standards.

Deficiencies were noted in the audits of all of the firms inspected, and in 95 percent (57 of 60) of the individual audits selected for inspection. Inspection staff did not identify deficiencies in every selected portion of the audits.

Audit deficiencies were most frequently noted with respect to:

  • Audit procedures related to the computations of the customer reserve and net capital requirements, and
  • Audit procedures related to financial statement areas, including procedures regarding tests of revenue, related parties, and the risk of material misstatement due to fraud.

In addition, Inspection staff found that, contrary to the requirements of SEC independence rules, some auditors were involved in the preparation of the financial statements that they audited. Independence findings were identified in more than one-third (22 of 60) of the audits selected for inspection, and in approximately 80 percent of the audits selected for inspection that were performed by firms that audited brokers and dealers but did not audit issuers.

"The nature and extent of audit deficiencies and independence findings included in this report are troubling," said Robert Maday, Deputy Director of the Division of Registration and Inspections and Program Leader of the Broker-Dealer Inspections Program. "We encourage registered public accounting firms to take action and conduct audits with due professional care, including professional skepticism."

The Board issued its first progress report in August 2012. In that first look, PCAOB inspectors reviewed 10 audit firms covering portions of 23 audits of brokers and dealers registered with the SEC, and identified deficiencies in all of the audits inspected.

During 2013, the Board plans to inspect approximately 60 audit firms covering portions of about 90 audits. The Board expects that, by the end of 2013, the interim inspection program will include inspections of portions of more than 170 audits of brokers and dealers conducted by approximately 100 registered public accounting firms.

The Board currently anticipates presenting a rule proposal for a permanent inspection program in 2014 or later. Meanwhile, the Board will continue the interim inspection program until new rules for a permanent program are adopted and become effective.

On July 30, 2013, the SEC approved amendments to Exchange Act Rule 17a-5 that affect certain annual reporting, audit, and notification requirements for brokers and dealers. These amendments include the requirement that the audits of brokers and dealers be conducted in accordance with PCAOB standards for fiscal years ending on or after June 1, 2014.

The interim inspection program was implemented in August 2011 in response to new oversight authority given to the Board over auditors of SEC-registered brokers and dealers by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The interim program has two purposes. First, it enables the Board to assess the compliance of registered firms and their associated persons conducting audits of brokers and dealers with the Sarbanes-Oxley Act, PCAOB and SEC rules, and professional standards. Second, it informs the Board's eventual determinations about the scope and elements of a permanent inspection program.

 A fact sheet on the second progress report is also available.