Adoption of Final Rule on Interim Inspection Program for Auditors of Brokers and Dealers

As the staff presentation makes clear, the Board's action today is based on careful consideration of the thoughtful comments we received on the Board's December 2010 proposal.

The Dodd-Frank amendments do not prescribe a specific program of inspection. Rather, the Act authorizes the Board to establish such a program by rule, and leaves to the Board important questions concerning the elements of the program.

As the staff have described, the Dodd-Frank amendments allow the Board to assign different inspection schedules to different kinds of auditors of brokers and dealers. They also provide that, if the Board exempts any accounting firm from our inspection program, the firm would not be required to register with the Board.

I take these provisions seriously, as I know the Board did when it proposed and sought comment on the rule we consider today. It is important to remember where the PCAOB's oversight fits in the overall framework of regulations already in place. It is also important to reflect on the limits of the Board's new authority.

Brokers and dealers are already subject to regulatory oversight. Both the SEC and FINRA have authority over the brokers and dealers who have direct contact with investors. The PCAOB does not.

I think it was wise of the previous Board to propose a program that would allow it promptly to begin inspection work to implement the statute. But it's equally important that the program allow us flexibility, so we can concentrate our resources on areas where our work will provide meaningful investor protection. It is also important that we do this in a way that doesn't impose unnecessary burdens in any areas, especially those where our oversight may not have a meaningful effect on fraud deterrence.

The program will thus be limited, in time and scope. After gaining valuable insight through the interim inspection program, I anticipate that we will then carefully consider whether there should be exemptions from the permanent program, including for auditors of brokers that bear the characteristics highlighted by commenters, such as so called introducing brokers who are not permitted to accept client funds.

Fair arguments have been advanced that auditor oversight is not the most effective way to combat certain kinds of fraud perpetrated on investors by broker-dealers. During the legislative process, SIPC and the SEC's Chief Accountant put forward evidence that frauds by brokers do occur. But others ask whether PCAOB oversight of the broker's auditor would meaningfully deter that broker from perpetrating fraud. That's a question to which I don't pretend to know the answer today. Interim inspection procedures should help us to get a better handle on it.

Congress made a deliberate decision not to exempt any class of broker-dealer auditor from Board oversight. With the benefit of the results of our interim inspection program, which Congress did not have when it included all auditors of registered brokers and dealers within PCAOB oversight, we may be able to narrow the scope and cost of the law to focus on areas where our oversight would make a difference.

To this end, the temporary program will look a lot different than the full inspection program will. The interim program will not include firm-specific inspection reports. Instead, to keep the public informed of our progress, we will periodically publish reports on the types of investor risk inspectors find.

Importantly, though, if we find violations of law, we won't wait to act on them. We will use our disciplinary authority in any appropriate cases of auditor misconduct. And we will refer information about potential broker-dealer misconduct to both the SEC and FINRA.

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