Fact Sheet: Annual Report on the 2016 Inspections of Broker-Dealer Auditors

August 18, 2017

The Public Company Accounting Oversight Board today issued an annual report on its inspections in 2016 of auditors of brokers and dealers under its interim inspection program. 

The annual report describes the results of inspections during 2016 of 75 firms covering portions of 115 audits and related attestation engagements.

Independence Findings

PCAOB inspectors identified independence findings in 11 audits covered by the 2016 inspections, or 10 percent, which increased from the 7 percent identified in 2015 inspections. All of the findings involved auditors preparing the financial statements of broker-dealers or performing bookkeeping or other prohibited services. The 11 independence findings were identified at firms that do not audit public companies.

Deficiencies in Audit Engagements

Deficiencies were observed in the audits at 73 of the 75 firms inspected during 2016, or 97 percent, which was comparable to the 96 percent observed from inspections during 2015. In addition, deficiencies were observed in 96 of the 115 audits covered by the 2016 inspections, or 83 percent, up from 77 percent in 2015.

PCAOB inspectors identified deficiencies during 2016 in:

  • Auditing revenue in 66 percent of the audits, down from 70 percent in 2015
  • Auditing risks of material misstatement due to fraud in 57 percent of the audits, up from 42 percent in 2015
  • Auditing related party transactions in 33 percent of the audits, which was comparable to the 32 percent in 2015
  • Auditing fair value measurements in 24 percent of the audits, down from 44 percent in 2015
  • Auditing supplemental information related to the Securities and Exchange Commission's Customer Protection Rule in 52 percent of the audits, which was comparable to the 53 percent in 2015
  • Performing the required engagement quality review in 57 percent of the audits, which was the same as in 2015, including in 2016 eight audits in which no engagement quality review was performed, compared to seven audits in 2015

Deficiencies in Attestation Engagements

Deficiencies were observed in the attestation engagements at 46 of the 75 firms inspected during 2016, or 61 percent, down from 73 percent observed from inspections during 2015. In addition, deficiencies were observed in 55 of the 115 attestation engagements covered by the 2016 inspections, or 48 percent, down from 55 percent in 2015.

PCAOB inspectors identified deficiencies during 2016 in:

· Examining broker-dealers' compliance reports in 70 percent of the examinations, down from 78 percent in 2015

· Reviewing broker-dealers' exemption reports in 28 percent of the reviews, down from 34 percent in 2015

· Performing the required engagement quality review in 26 percent of the reviews, down from 34 percent in 2015, including in 2016, eight reviews in which no engagement quality review was performed, compared to seven reviews in 2015

Interim Inspection Program

Since the start of the interim inspection program in the fourth quarter of 2011 through December 31, 2016, the PCAOB has performed 334 inspections of 264 firms that conducted audits of broker-dealers. These inspections covered portions of 514 audit engagements and 233 attestation engagements. Over that time, PCAOB inspectors have observed lower percentages of deficiencies among firms that also audit issuers or performed audits for more than 100 broker-dealers.

The Board will continue to conduct inspections of firms that perform audits and related attestation engagements for broker-dealers under the interim inspection program until rules for a permanent inspection program take effect. The PCAOB staff will continue to work to further develop the contours of a potential rule proposal for the Board to consider for a permanent inspection program.