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

DATE: Oct. 10, 2013
SPEAKER: Steven B. Harris, Board Member
EVENT: PCAOB Open Board Meeting
LOCATION: Washington, DC

Thank you, Chairman Doty.

I support the adoption of the standards before us today. I view the Board's adoption of these standards as another step forward in our oversight of the audits of brokers and dealers.

A little over three years ago, the Dodd-Frank Wall Street Reform and Consumer Protection Act granted the Board oversight over the audits of broker-dealers registered with the Securities and Exchange Commission. A year later, the SEC proposed amendments to Securities Exchange Act Rule 17a-5 regarding the annual reporting by broker-dealers which included a requirement that audits of broker-dealers be conducted pursuant to PCAOB standards. Shortly after the SEC's proposal, we proposed attestation standards on the reports proposed by the SEC and an auditing standard on supplemental information that related to information filed by broker-dealers and others.

Today, the Board is adopting two attestation standards — an examination standard and a review standard. These standards are closely coordinated with the Commission's recently adopted amendments to Rule 17a-5.

Specially, the examination standard establishes requirements for auditors in examining certain statements in a broker-dealer's compliance report, which is required for broker-dealers that have custody of customer assets. The review standard establishes requirements for the auditor's review of the broker-dealer's statements in an exemption report, which is for broker-dealers that do not have custody of customer assets.

In addition to the new compliance or exemption reports, broker-dealers file certain supplemental information with their financial statements. The supplemental information includes supporting schedules showing the broker-dealer's calculation of its net capital, reserve requirements and information related to the possession or control of its customers' assets. We are also adopting an auditing standard on supplemental information that guides the auditor's review and reporting on this supplemental information.

Without going through the technical requirements of these standards, I believe that they strike an appropriate balance between enhancing customer and investor protection and the regulatory impact of implementing these new standards. The standards emphasize coordination between the audit of the financial statements and related supplemental information and the attestation of the compliance or exemption report. This coordination is designed to promote overall audit effectiveness while reducing redundancy in the audit process and should help promote appropriate efficiencies.

The standards also include requirements related to the auditor's consideration of fraud risks, including the risk of the misappropriation of customer assets. By focusing on risk, the standards are intended to be scalable for audits of different types and sizes of broker-dealers. This is very important due to the diverse and complex operations of the over 5,000 SEC-registered broker-dealers whose audits and reports will now be subject to PCAOB standards.

While the primary user of the financial statements and compliance or exemption reports of broker-dealers may be different from the users of issuers' financial statements, the objective is the same — to protect investors and customers by providing independent assurance that broker-dealers comply with certain financial responsibility rules designed to enhance the protection of customer assets. These measures include requiring broker-dealers to maintain prudent levels of net capital and take steps to safeguard customer assets. These standards also should provide regulators with greater confidence in the quality and consistency of the financial statements, compliance or exemption reports, and supplemental information accompanying audited financial statements of broker-dealers, and others.

Further, as noted in the Board's second report on the progress of its interim inspection program for auditors of broker-dealers, inspections staff identified audit deficiencies in 57 of the 60 audits selected for inspection. The standards we are adopting today are tailored for the new audit and reporting requirements in SEC Rule17a-5 and establish an approach that should provide greater clarity as to the procedures that should be performed by auditors and promote improved performance in the audits of broker-dealers.

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In closing, I would like to join you, Mr. Chairman, and the other Board members in thanking Marty Baumann, Keith Wilson, Barbara Vanich and Nick Grillo, as well as the staff in the Division of Registration and Inspections, Office of Research and Analysis, and the General Counsel's Office for their efforts in bringing these standards before the Board today. As always we appreciate the contributions of the staff of the Securities and Exchange Commissions' Office of the Chief Accountant.

 

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