Fact Sheet: Annual Report on the Progress of the Interim Inspection Program Related to Audits of Brokers and Dealers (August 18, 2015)

Why the Board is Issuing this Report

The Public Company Accounting Oversight Board released its annual report on the progress of the interim inspection program for auditors of brokers and dealers registered with the Securities and Exchange Commission.

The interim program began in the fall of 2011 in response to the Board's new oversight authority provided in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Board has issued annual progress reports on the interim program beginning in August 2012.

The Interim Inspection Program

  • Enables the Board to assess the compliance of registered firms and their associated persons conducting audits of broker-dealers with the Sarbanes-Oxley Act, Board and SEC rules, and professional standards.
  • Informs the Board's eventual determinations about the scope and elements of a permanent inspection program.

Inspections of Registered Public Accounting Firms During 2014

  • Encompassed audits selected for inspection during 2014 that had financial statement periods ended on or before May 31, 2014.
  • Inspected 66 audit firms reviewing portions of 106 audits of SEC-registered broker-dealers, which were required to be performed under GAAS.
  • Identified audit deficiencies at each of the firms inspected and in 92 of the 106 audits selected for inspection.
  • Identified independence findings in 26 of the 106 audits inspected.
  • Of the 66 audit firms inspected:
    • 27 firms were already subject to PCAOB inspection because they audited public companies.
    • 39 firms were not subject to inspection other than under the interim inspection program.

Audit Deficiencies

Audit deficiencies were noted at all 66 firms inspected and in portions of 92 of the 106 audits selected for inspection (or approximately 87 percent).

The most frequent audit deficiencies were observed in the following areas:

  • Revenue recognition
  • Reliance on records and reports
  • Fair value accounting estimates
  • Financial statement presentation and disclosures
  • Audit procedures related to the customer protection rule

Additionally, seven audits by seven firms were selected to evaluate whether or how certain audit deficiencies identified during a previous inspection had been addressed in the current audit. In all seven audits, at least one audit deficiency in the same area as previously identified was noted by Inspections staff.

Independence Findings

Inspections staff found that, contrary to the requirements of SEC independence rules, some auditors were involved in the preparation of financial statements that they audited, and some auditors included in the terms of the engagement letter language that would indemnify the auditor in the event of incurred losses.

Independence findings were identified in approximately 25 percent (26 of 106) of the audits selected for inspection. These findings included:

  • Involvement in the preparation of the financial statements in approximately 43 percent (18 of 42) of the audits selected for inspection that were performed by 39 firms that audited broker-dealers but did not audit issuers.
  • Involvement in the preparation of the financial statements in approximately 6 percent (four of 64) of the audits selected for inspection that were performed by 27 firms that audited broker-dealers and also audited issuers.
  • Engagement letters for four audits selected for inspection included clauses that would indemnify the auditor in the event the auditor incurred certain losses or liability in connection with the engagement.

Summary of Inspections of Registered Public Accounting Firms Since Inception of the Interim Inspection Program

Since inception of the interim inspection program through the end of 2014, the Board has inspected 155 registered public accounting firms covering portions of 279 audits that were required to be performed under GAAS. Thirteen of these firms were inspected more than once.

Overall Observations

  • Audit deficiencies or independence findings (collectively "observations") were identified in 243 of the 279 portions of audits selected for inspection (approximately 87 percent).
  • The 36 audits where no observations were identified were performed by 15 firms, 12 of which also audited issuers.
  • The percentage of observations in the audits and areas inspected in 2014 continued to remain high and was higher in comparison to the inspections performed during 2013.
  • High percentages of observations were identified across firm and broker-dealer characteristics.

Observations by Firm Characteristics

  • Firms that did not also audit issuers were noted to have a higher percentage of audits with observations than the firms that also audited issuers.
  • Firms that audited 100 or fewer broker-dealers had a higher percentage of audits with observations than firms that audited more than 100 broker-dealers.

Observations by Broker-Dealer Characteristics

  • Generally, there did not appear to be a discernible relationship between the percentage of audits with observations and broker-dealer characteristics with two exceptions:
    • Lower percentages of observations were noted for the selected audits of broker-dealers with the highest amounts of reported actual net capital, revenues, or assets; and
    • Lower percentages of observations were noted for audits of broker-dealers that did not claim an exemption under Rule 15c3-3 than for audits of broker-dealers that claimed an exemption under Rule 15c3-3.

Next Steps of the Interim Inspection Program

Future Inspections

  • During 2015, the Board plans to inspect approximately 75 firms and portions of approximately 115 audits.
  • During 2015, the Board will inspect audits of broker-dealers, which are required to be performed in accordance with PCAOB standards, to assess compliance with PCAOB standards, rules of the SEC and the Board, and the Sarbanes-Oxley Act of 2002.

Scope of a Permanent Inspection Program

  • PCAOB staff is working to develop a rule proposal for the Board to consider during 2016 to establish a permanent inspection program.
  • The Board is continuing to take a careful and informed approach in establishing a permanent inspection program.
  • The Board continues to consider the risk of loss to customers and the high percentage of audit deficiencies and independence findings that have been observed during the inspections under the interim inspection program.

Other Initiatives

  • The Board will continue to conduct forums for auditors of broker-dealers that provide information about the Board, the interim inspection program, observations from the interim inspection program, and audits of broker-dealers.
  • The Board will participate in various outreach initiatives, including conferences and other events to inform registered public accounting firms that issue audit reports for broker-dealers about observations from the interim inspection program, developments in the Board's standard-setting initiatives, and updates from the SEC and Financial Industry Regulatory Authority.
  • The Board will issue guidance for audits of broker-dealers, if needed, and will continue using communication tools such as webcasts and presentations to effectively deliver guidance and information to auditors of broker-dealers.