Statement on Auditing Standard on Auditing Supplemental Information and Attestation Standards for Broker-Dealer Audits

The attestation and auditing standards and related amendments that we are considering today establish requirements for auditors of brokers and dealers that are registered with the Securities and Exchange Commission. The Dodd-Frank Wall Street Reform and Consumer Protection Act[1] amended the Sarbanes-Oxley Act to authorize the PCAOB to carry out oversight responsibilities for broker-dealer audits.

On July 30, 2013, the SEC approved amendments to its Rule 17a-5, which includes requirements that broker-dealers file annual financial reports with the SEC that are audited in accordance with PCAOB standards. The amended rule also requires broker-dealers to file new compliance and exemption reports that are covered by an auditor's report prepared in accordance with PCAOB standards.

The standards and related amendments adopted today constitute another milestone in the Board's implementation of broker-dealer audit oversight envisioned by the Dodd-Frank Act, and they support the SEC's focus on improving the practices and controls of broker-dealers related to safeguarding customer securities and funds.[2]

The Need for Board Action

In response to the loss of confidence in the safekeeping of customer securities and funds by securities broker-dealers, exemplified by the Bernard L. Madoff Investment Securities and Bayou Hedge Fund frauds, Congress drafted section 982 of the Dodd-Frank Act to subject auditors of brokers and dealers to the PCAOB regulatory oversight programs in place for public company auditors.[3] With the SEC's promulgation of amendments to Rule 17a-5, auditors of broker-dealers must now conduct their audits and related work in accordance with PCAOB professional standards. Oversight for broker-dealer audits now involves the four major regulatory functions of the Board: registration, inspections, professional standards, and enforcement.

The Board had previously adopted rules and procedures for broker-dealer auditors to register with the PCAOB,[4] and it established an interim inspection program to assess the degree of compliance with applicable rules and standards on audits of broker-dealers.[5]

The Board's first two reports of summary inspection findings under the interim program have identified a disturbingly high rate of serious deficiencies in the financial statement audits that have been performed according to generally accepted auditing standards (GAAS). They also identified a high level of non-compliance with other applicable rules, such as audit procedures related to customer protection and net capital under the Exchange Act rules and the SEC's rules on auditor independence.[6]

The SEC's amendments to Rule 17a-5 require auditors to follow PCAOB standards[7] for audits of broker-dealer's annual financial reports, which consist of audited financial statements and supporting schedules. The amendments also require the auditor to examine a broker-dealers' newly required compliance report, or review the newly required exemption report if a broker-dealer is claiming an exemption from certain customer protection rules. The standards and related amendments adopted today address the requirements for audit procedures performed on supplemental information and auditor attestation procedures and reporting on broker-dealer compliance or exemption reports.[8]

As the release accompanying today's standards indicates, the Board will take action in the near future on other amendments to PCAOB rules to conform them to the provisions of section 982 of Dodd-Frank.[9] Among other things, those amendments will clarify which auditing standards, interim auditing standards, and other PCAOB professional standards will apply to auditors of broker-dealers. Accordingly, the Board's upcoming adoption of these amendments will be an important factor in finalizing the professional standards and auditing requirements that will apply to broker-dealer auditors and their audits.

Key Elements of the New Standards

I would like to highlight a few key elements of the new standards and related amendments being adopted today.

The Board's new attestation standards, AT Nos. 1 and 2, represent a tailored version of the existing attestation standards (AT §§ 101 and 601) for the specific financial responsibility requirements for broker-dealers in the amended Rule 17a-5. And while they are stand-alone standards, the new attestation standards are designed to emphasize coordination between the audit of the broker-dealer's financial statements, supplemental information, and the compliance or exemption report.

These new standards support the SEC's focus on broker-dealer's practices and internal controls over compliance with the financial responsibility rules, particularly those involving the safeguarding of customer securities and funds. The new standards incorporate requirements for risk assessment procedures specifically related to the risks of fraud, including the risk of misappropriation of customer assets.

Auditing Standard No. 17 is designed to provide the SEC and other regulators with greater confidence in the quality and consistency of supplemental information that is filed with financial statements, such as the supporting schedules required under Rule 17a-5 for broker-dealers and certain schedules required by the Department of Labor for some Form 11-K filers. Again, these standards are designed to emphasize coordination with the financial statement audit by, for example, retaining the concept from existing standards for auditors to test and evaluate the supplemental information "in relation to" the financial statements taken as a whole.

In developing these standards and the related amendments, the staff has taken care to describe the factors included in the Board's the economic considerations in this rulemaking. The release describes the baseline conditions under which broker-dealer auditors operate, the alternatives considered by the Board, and the input of commenters on these and related matters.

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I fully support adoption of the attestation and audit standards, and related amendments that we are considering today.

I would like to thank Keith Wilson, Barbara Vanich, Nick Grillo, and Karen Burgess in the Office of the Chief Auditor and Bob Burns and Jennifer Williams in the Office of the General Counsel for their contributions to the development of these new standards and related amendments.

[1] Public Law No. 111-203, § 982 (July 21, 2010).

[2] See e.g., SEC Exchange Act Release No. 34-70073, July 30, 2013, at p. 21.

[3] See Senate Report No. 111-176, Apr. 30, 2010 (accompanying S. 3217).

[4] Auditors of SEC-registered brokers and dealers were required by the Sarbanes-Oxley Act of 2002 and PCAOB rules to register with the Board, but an order of the SEC exempted broker-dealers from this requirement until that order expired in 2008. Under PCAOB rules, effective Dec. 31, 2009, registered broker-dealer auditors must also file annual reports with the PCAOB.

[6] See PCAOB Release No. 2012-005, "Report on the Progress of the Interim Inspection Program Related to Audits of Brokers and Dealers," and PCAOB Release No. 2013-006, "Second Report on the Progress of the Interim Inspection Program Related to Audits of Brokers and Dealers," at http://pcaobus.org/Inspections/Pages/PublicReports.aspx.

[7] SEC Rule 17a-5(g)(1), (g)(2)(i), and (g)(2)(ii). Previously, pursuant to a SEC interpretative release, broker-dealer auditors applied GAAS, which is established by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA), to broker-dealer audits. See SEC Exchange Act Release No. 34-62991, Sept. 24, 2010.

[8] The auditor must also perform agreed-upon procedures for certain broker- dealers related to the applicable general assessments of the Securities Investor Protection Corporation. See SEC Rule 17a-5(e)(4).

[9] The Board proposed such amendments in February 2012. See PCAOB Release No. 2012-002, at http://pcaobus.org/Rules/Rulemaking/Pages/Docket039.aspx.