The Board adopted attestation standards pertaining to audits of brokers and dealers, an auditing standard for supplemental information accompanying financial statements audited according to PCAOB standards, and related amendments to other PCAOB standards.
These standards are intended to enhance the quality of broker-dealer compliance information provided to the SEC and used in its regulatory oversight, which is important for the protection of customers who entrust their cash and securities to broker-dealers.
The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Sarbanes-Oxley Act to, among other things, authorize the PCAOB to oversee audits of broker-dealers registered with the U. S. Securities and Exchange Commission (SEC). Specifically, the Dodd-Frank amendments provided the Board with authority to carry out oversight responsibilities for audits of broker-dealers, including inspections, standard setting, investigations and disciplinary proceedings.
On July 30, 2013, the SEC amended its Rule 17a-5 to enhance safeguards for customer assets held by broker-dealers. The amendments include a requirement that broker-dealers file annual financial reports with the SEC that are audited in accordance with PCAOB standards. Additionally, the SEC adopted requirements for new compliance and exemption reports that are covered by an auditor's report prepared in accordance with PCAOB standards.
The PCAOB adopted two attestation standards that cover the auditor's examination regarding compliance reports and the auditor's review regarding exemption reports of broker-dealers. The Board also adopted a new standard for auditing supplemental information that accompanies the financial statements.
Subject to SEC approval, the standards will become effective for audits of financial statements for fiscal years ending on or after June 1, 2014, to coincide with the effective date for the broker-dealer reporting requirements recently issued in the SEC Rule 17a-5 amendments.
The Examination Standard: Attestation Standard No. 1, Examination Engagements Regarding Compliance Reports of Brokers and Dealers, establishes requirements for the auditor's examination of certain statements in broker-dealer compliance reports.
Consistent with SEC Rule 17a-5, the examination standard requires auditors to obtain sufficient appropriate evidence to opine on a broker-dealer's statements in its compliance report as to whether:
- The broker-dealer's Internal Control over Compliance was effective during the most recent fiscal year;
- The broker-dealer's Internal Control over Compliance was effective as of the end of the most recent fiscal year;
- The broker-dealer was in compliance with the net capital rule and the reserve requirements rule as of the end of the most recent fiscal year; and
- The information the broker-dealer used to state whether it was in compliance with the net capital rule and reserve requirements rule was derived from its books and records.
Additionally, the examination standard provides requirements for auditors that:
- Focus the auditor on the matters that are most important to the auditor's conclusions regarding the statements of the broker-dealer;
- Incorporate consideration of fraud risk, including the risk of misappropriation of customer assets;
- Are designed to be scalable, based on the size and complexity of the broker-dealer;
- Coordinate the examination engagement with the audit of the financial statements and the audit procedures performed on supplemental information; and
- Describe how to report on an examination engagement, in connection with the requirements of SEC Rule 17a-5.
Review Standard: Attestation Standard No. 2, Review Engagements Regarding Exemption Reports of Brokers and Dealers, establishes requirements for the auditor's review of the statements in broker-dealer exemption reports.
Consistent with SEC Rule 17a-5, the review standard requires auditors to obtain moderate assurance about the following statements in the broker-dealer's exemption report:
- A statement that identifies the "exemption provisions" under which the broker-dealer claimed an exemption;
- A statement that the broker-dealer (1) met the identified exemption provisions throughout the most recent fiscal year without exception; or (2) met the identified exemption provisions throughout the most recent fiscal year, except as described in the exemption report; and
- If applicable, a statement that identifies each exception during the most recent fiscal year in meeting the identified exemption provisions and that briefly describes the nature of each exception and the approximate date(s) on which the exceptions existed.
AS No. 17: Supplemental Information
Auditing Standard No. 17, Auditing Supplemental Information Accompanying Audited Financial Statements, establishes the auditor's responsibilities when performing audit procedures and reporting on supplemental information that accompanies the audited financial statements of broker-dealers and others, such as certain employee benefit plans that must file with the SEC audited financial statements and schedules prepared in accordance with certain financial reporting requirements of the Employee Retirement Income Security Act of 1974.
Supplemental information is often required by regulators for oversight purposes. AS No. 17 is intended to give the SEC and other users greater confidence in the quality and consistency of supplemental information accompanying audited financial statements of broker-dealers and others. In addition to supplemental information provided by broker-dealers, the standard may be used for other types of supplemental information specified by the standard.
The standard includes auditor performance requirements to:
- Determine that the supplemental information reconciles to the underlying accounting and other records or to the financial statements, as applicable;
- Test the completeness and accuracy of the supplemental information, to the extent that it was not tested as part of the audit of the financial statements; and
- Evaluate whether the supplemental information, including its form and content, complies with relevant regulatory requirements or other applicable criteria, if any.
When accompanying audited financial statements, the term "supplemental information" refers to:
- Supporting schedules broker-dealers are required to file pursuant to SEC Rule 17a-5;
- Supplemental information (i) required to be presented pursuant to the rules and regulations of a regulatory authority; and (ii) covered by an auditor's report on that information related to financial statements that are audited in accordance with PCAOB standards; or
- Information that is (i) ancillary to the audited financial statements; (ii) derived from the company's accounting books and records; and (iii) covered by an auditor's report on that information related to financial statements audited in accordance with PCAOB standards.
- Under the recent amendments to SEC Exchange Act Rule 17a-5, a broker-dealer must prepare and file with the SEC an annual report, consisting of a financial report and either a compliance report or an exemption report that is prepared by the broker-dealer, as well as certain reports that are prepared by a PCAOB-registered auditor that relate to the financial report, and the compliance or exemption report.
- Before the recent amendments to SEC Rule 17a-5, audits of broker-dealers were required to be performed under generally accepted auditing standards established by the American Institute of Certified Public Accountants (AICPA).
- The Board initially proposed the attestation standards and supplemental information standard on July 12, 2011.
- The Board adopted these standards after consideration of comments received on the proposal and as a result of amendments made to Rule 17a-5 that were adopted by the SEC on July 30, 2013.
Next Steps for Broker-Dealer Audits
- Conforming Amendments: In February 2012, the Board proposed to update certain of its rules to conform to the Dodd-Frank amendments to the Sarbanes-Oxley Act. In part, these proposals would amend the Board's rules requiring that registered firms comply with the Board's auditing standards, as well as most of the Board's ethics and independence requirements, in conducting broker-dealer audit engagements. The Board expects to act on these proposed amendments in separate rulemaking in the near future.
- Broker-Dealer Audit Inspection Program: In August 2011, the Board began inspections under an interim inspection program for registered firms that audit broker-dealers. Progress reports were issued on observations from these inspections in August 2012 and August 2013. The Board will continue to conduct inspections of audits of broker-dealers under the interim inspection program until rules for a permanent inspection program take effect. The Board will continue to gather and assess information to inform an eventual rule proposal concerning the scope of a permanent inspection program. The Board currently anticipates presenting a rule proposal for a permanent inspection program in 2014 or later.