PCAOB Annual Report on Inspections of Broker and Dealer Auditors Continues to Show High Levels of Independence Findings and Audit Deficiencies

The Public Company Accounting Oversight Board today issued an annual report on its interim inspection program for auditors of brokers and dealers registered with the Securities and Exchange Commission that identified high levels of independence findings and audit deficiencies, similar to reported findings and deficiencies in previous years.

For inspections conducted in 2014, PCAOB staff identified independence findings in 26 of the 106 audits selected for inspection, primarily related to assisting with the preparation of financial statements. Twenty of those audits were performed by firms that did not also audit public companies or other issuers.

Inspections staff identified audit deficiencies at each of the 66 firms it inspected in 2014 under the interim program and in 87 percent of the audits selected for inspection. Seven firms, of which five also audited issuers and were thus subject to regular inspection by the PCAOB, performed the audits where Inspections staff did not identify any deficiencies in the portions of audits inspected.

"We have been urging firms that audit broker-dealers to re-examine their audit approaches due to ongoing issues identified during inspections," said Robert Maday, PCAOB Deputy Director of the Division of Registration and Inspections and Program Leader of the Broker-Dealer Audit Firm Inspection Program.

The report, the fourth annual summary of inspection findings and deficiencies issued by the PCAOB under the interim program, covers inspections conducted in 2014 of audits for fiscal years ended on or before May 31, 2014. All of the audits included in the report were required to be performed under generally accepted auditing standards. Beginning with fiscal years ended on or after June 1, 2014, audits of broker-dealers are required to be performed in accordance with PCAOB standards.

Inspections staff identified audit deficiencies in the procedures performed by the firms related to the customer protection rule in 43 percent of the audits selected for inspection where the broker-dealer held customer assets. In addition, Inspections staff found frequent audit deficiencies in revenue recognition, reliance on records and reports, fair value accounting estimates, and financial statement presentation and disclosure.

Audit deficiencies involve auditors omitting, or insufficiently performing, certain audit procedures. They do not necessarily indicate that there are errors in a broker-dealer's financial reporting or that the broker-dealer was not in compliance with relevant SEC rules.

The annual report also details inspection results since the inception of the interim inspection program of auditors of broker-dealers.

Although findings and deficiencies were identified across all types of audit firms, firms that did not also audit issuers were noted to have a higher percentage of findings and deficiencies than firms that also audited issuers.

Inspections staff also noted significantly lower percentages of audits and areas with findings and deficiencies for the audits of broker-dealers with the highest amounts of reported net capital.

The PCAOB's plans for the interim program include an increase of about 14 percent in the number of firms to be inspected during 2015. The Board also is taking a careful and informed approach in establishing a permanent inspection program of auditors of broker-dealers. PCAOB staff is currently working toward a rule proposal for a permanent inspection program for the Board to consider in 2016.

Read the full report, Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers. A fact sheet on the annual report is also available.