PCAOB Adopts Interim Inspection Program for Broker-Dealer Audits and Broker and Dealer Funding Rules
The Public Company Accounting Oversight Board today adopted certain rules to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act related to audits of securities brokers and dealers.
Specifically, the Board adopted a temporary rule to establish an interim inspection program for registered public accounting firms' audits of brokers and dealers. The Board also adopted rules for assessing and collecting a portion of its accounting support fee from brokers and dealers to fund PCAOB oversight of audits of brokers and dealers, consistent with the Dodd-Frank Act. The Board also adopted certain amendments to existing funding rules for issuers.
"The Board's actions today are an important step in oversight of the audits of brokers and dealers," said PCAOB Chairman James R. Doty. "The interim inspection program will allow the Board to gain a better understanding of how PCAOB can provide meaningful investor protection, consistent with our intent to avoid imposing unnecessary burdens on smaller auditors and broker-dealers.
"And I believe the amendments to the Board's funding rules provide an efficient mechanism to fund the PCAOB's oversight without imposing unwarranted costs and administrative burdens on smaller brokers and dealers," he added.
Interim Inspection Program
The Dodd-Frank Act authorized the Board to establish, by rule, a program of inspection of auditors of brokers and dealers. The law leaves to the Board, subject to the approval of the Securities and Exchange Commission, important questions concerning the scope of the program and the frequency of inspections, including whether to differentiate among categories of brokers and dealers and whether to exclude from the inspection program any categories of auditors.
The temporary rule adopted by the Board today provides for an interim inspection program while the Board considers the scope and other elements of a permanent inspection program.
Under the temporary rule, the Board will begin to inspect auditors of brokers and dealers and identify and address with the registered firms any significant issues in those audits. The Board also expects that insights gained through the interim program will inform the eventual determination of the scope and elements of a permanent program, and the Board expects to propose rules governing the scope and elements of a permanent program in 2013.
During the interim program, the Board will provide public reports on the progress of the interim program and significant issues identified. In the absence of unusual circumstances, however, the Board will not issue firm-specific inspection reports before inspection work is performed under the permanent program and will not issue firm-specific inspection reports on any firms that are eventually excluded from the scope of the permanent program.
The temporary rule does not change anything about the rules or standards that govern audits of broker-dealers. As the SEC has previously explained, its rules continue to require those audits to be carried out under GAAS, or generally accepted auditing standards.
Section 109 of the Sarbanes-Oxley Act, as originally enacted, provided that funds to cover the PCAOB annual budget, less registration and annual fees paid by registered public accounting firms, would be collected from issuers based on each issuer's relative average monthly equity market capitalization. The amount due from issuers is referred to as the accounting support fee.
As amended by the Dodd-Frank Act, Section 109 now requires that the Board allocate respective portions of its total accounting support fee among issuers and brokers and dealers, and allows for differentiation among classes of brokers and dealers.
The funding rules adopted today, which are subject to approval by the Commission, would result in brokers and dealers with more than $5 million in tentative net capital being allocated an appropriate portion of the accounting support fee. The Board anticipates that the rules will be in effect for its 2011 funding cycle for broker and dealers, which begins in the fall.
The Board also adopted amendments to its funding rules for issuers, based on its experience with the accounting support fee process for issuers since 2003. The amendments, among other things, increase the market capitalization threshold for equity issuers from $25 million to $75 million and investment company issuers from $250 million to $500 million and revise the basis for calculating an issuer's market capitalization to include the market capitalization of all classes of an issuers' voting and non-voting common equity rather than just its common stock. The Board anticipates that the rules related to the accounting support fee for issuers, subject to SEC approval, would become effective for its 2012 funding cycle for issuers.