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

The Public Company Accounting Oversight Board today released its first report on the progress of the interim inspection program for auditors of brokers and dealers, providing an overview of the new program and the audit deficiencies identified in the initial group of inspected audits of brokers and dealers.

In this first look, carried out over a five-month period from October 2011 to February 2012, PCAOB inspectors reviewed 10 audit firms covering portions of 23 audits of brokers and dealers registered with the Securities and Exchange Commission, and identified deficiencies in all of the audits inspected.

The 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.

“While the results of these initial inspections cannot be generalized to all securities broker and dealer audits and represent only a small portion of the inspections planned for the interim program, the nature and extent of the findings are of concern to the Board,” said James R. Doty, PCAOB Chairman.

The report, entitled, “Report on the Progress of the Interim Inspection Program Related to Audits of Brokers and Dealers,” describes deficiencies observed in the following areas:

  • Audit procedures related to the computations of customer reserve and net capital requirements,
  • Audits of financial statements, and
  • Auditor independence.
    “All registered firms that issue audit reports for SEC-registered brokers and dealers should consider whether the audit deficiencies described in this report might be present in audits they currently perform, and should take appropriate action to prevent or correct any such deficiencies identified,” said Doty.

Three of the 10 firms were already subject to PCAOB inspection because they audited public companies; seven were newly subject to inspection under the interim inspection program. The audits and firms selected are not representative of all broker and dealer audits, or all auditors for SEC-registered brokers and dealers.

During the interim inspection program, the Board expects to review approximately 100 audit firms covering portions of more than 170 audits of brokers and dealers through 2013. The program is currently designed to cover a cross-section of audits of SEC-registered brokers and dealers. The Board will continue the interim inspection program until new rules for a permanent program are adopted and become effective.

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

The 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, Board and SEC rules, and professional standards. Second, it informs the Board’s eventual determinations about the scope and elements of a permanent inspection program.