Fact Sheet: Annual Report on the Interim Inspection Program for Auditors of Brokers and Dealers

August 18, 2016

The Public Company Accounting Oversight Board today issued an annual report on its interim inspection program for auditors of brokers and dealers.

The annual report describes results of inspections conducted in 2015, the first inspection year in which all inspected engagements were governed by the Securities and Exchange Commission's 2013 amendments to Exchange Act Rule 17a-5, including the new requirement that broker-dealer audits be performed in accordance with PCAOB standards. The report shows high levels of deficiencies similar to inspection results in previous years.

PCAOB inspectors identified deficiencies in the work of 96 percent of the audit firms inspected. Auditor independence appeared to be impaired in 7 percent of the inspected audits, compared to 25 percent in 2014.

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

Inspections of Registered Audit Firms in 2015

All of the audits covered by the 2015 inspections were required to be performed under PCAOB standards and rules. During 2015, the Board inspected 75 firms covering portions of 115 audits and the related attestation engagements. PCOAB inspectors identified:

  • Deficiencies at 72 of the 75 firms inspected and in 77 percent of the audits, down from 87 percent in 2014
  • Deficiencies in auditing revenue were identified in 70 percent of the audits, down from 72 percent in 2014
  • Deficiencies in auditing related to the Customer Protection Rule (Exchange Act Rule 15c3-3) increased to 53 percent in 2015 from 43 percent in 2014
  • Deficiencies in auditing fair value measurements remained consistent with 2014 at 44 percent
  • Deficiencies related to the performance of the required engagement quality review were observed in 57 percent of the audits, including seven audits for which no engagement quality review was performed

The 2015 inspections also covered the auditor's examinations of broker-dealers' compliance reports and reviews of broker-dealers' exemption reports. Deficiencies were identified in the attestation engagements at 54 firms inspected and included the following:

  • Deficiencies in examining a broker-dealer's compliance report were identified in 78 percent of the examination engagements
  • Deficiencies in reviewing a broker-dealer's exemption report were identified in 34 percent of the review engagements
  • Deficiencies related to the performance of the required engagement quality review were observed in 48 percent of the examinations and 34 percent of the reviews, including seven reviews for which no engagement quality review was performed

Summary of Inspection Results Since Inception of the Interim Inspection Program

Since the inception of the interim inspection program, the PCAOB has performed 259 inspections of 210 firms that conducted audits of broker-dealers.

These inspections covered portions of 399 audits, of which 120 were required to be performed in accordance with PCAOB standards and 279 were required to be performed in accordance with GAAS. These inspections also included 118 attestation engagements that were required to be performed in accordance with PCAOB standards.

Inspections conducted through December 31, 2015 identified the following:

  • Independence findings in 79, or 20 percent, of the 399 audits
  • Deficiencies related to auditing in 336, or 84 percent, of the 399 audits
  • The 63 audits with no deficiencies related to auditing were performed by 21 firms, of which 15 also audited issuers
  • Although independence findings and deficiencies related to auditing were identified across all firms inspected, auditors that did not audit public companies were noted to have a higher percentage of audits with independence findings and deficiencies than firms that also audited public companies

Next Steps for the Interim Inspection Program

  • During 2016, the Board plans to perform inspections of 75 firms covering portions of approximately 115 audits and the related attestation engagements
  • PCAOB staff is currently working to develop a rule proposal for the Board to consider in 2016 to establish a permanent inspection program