The PCAOB and the Audits of Smaller Broker-Dealers

Good morning. Welcome to the inaugural PCAOB Forum on Auditing Smaller Broker-Dealers. I am Dan Goelzer, one of the five Board members of the Public Company Accounting Oversight Board. I will be the host and moderator of today's forum.

PCAOB Auditing Forums

For the past seven years, the PCAOB has been holding forums for the small business auditing community in cities across the United States. The goal of those forums is to open an avenue for discussion and dialogue with public company auditors. Our forums have been an opportunity to educate auditors and to provide guidance on the Board's work, particularly our inspection program. Nearly 3,000 accountants from several hundred firms have attended these forums, and the feedback we have received has helped to shape the Board's work.

Today's program marks the launch of a new initiative, specially tailored to auditors of broker-dealers. In light of the stunning revelation of the Ponzi scheme operated out of Bernard L. Madoff Investment Securities, Congress decided to strengthen the oversight of securities industry auditors. The Dodd-Frank Act, passed in the summer of 2010, gave the Board inspection and standard-setting authority over auditors of all SEC-registered securities broker-dealers. Many of those auditors had not previously been subject to the Board's jurisdiction. In fact, the SEC's pre-Dodd Frank decision to require broker-dealer auditor registration brought over 500 additional firms onto our registration rolls. We are still building our base of knowledge concerning the unique features and challenges of broker-dealer auditing. Similarly, many audit firms with a broker-dealer practice know little about the PCAOB. The new broker-dealer auditing forums are designed to bridge those gaps.

PCAOB Broker-Dealer Auditor Oversight Program

As you will hear, we are still designing our broker-dealer auditor oversight program. Before we begin today's agenda, I want to give you an overview of the Board's approach to this new responsibility. To my mind, it has three elements.

The first is investor protection. The Board was created to "protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports" for public companies — and now also for securities broker-dealers. Everything we do to implement our new authority will be measured against the yardstick of what is in the best interests of investors.

Second, the Board recognizes that its broker-dealer auditor oversight program must reflect the diversity of the broker-dealer population and the wide differences in risk profiles.

While there are a handful of mega firms, most broker-dealers are very small. Less than one percent — 32 firms — have net capital in excess of $1 billion. Those 32 firms hold over 75 percent of the net capital in the entire broker-dealer industry. At the other end of the spectrum, over 70 percent of all broker-dealers have net capital under $1 million. Collectively, those firms have less than 1 percent of industry net capital. As to activities, the pattern is similar. Only about 300 registered brokerage firms maintain custody of their client's securities and cash. Many of the other roughly 4,500 broker-dealers that file audited annual reports do not, at least in theory, have access to customer funds or securities. Some are insurance agents that sell products that are technically securities; some are finders active in the M&A market; some are captives that serve the trading needs of a single, affiliated client. Other categories of firms whose activities have only an indirect effect on the investing public exist as well. This diversity raises questions about whether and how, on a long-term basis, we should devote resources to inspecting the auditors of all of these categories of brokers and dealers.

Third, before pouring the concrete around a permanent regulatory program, the Board intends to make sure it is as fully educated as possible about costs and benefits.

Congress has made the decision that investor protection requires that broker-dealer auditors should be under Board oversight. But, the Board has considerable latitude to decide on matters like frequency of inspection and exemptions and exclusions. Our new program will benefit from some of the lessons learned over the past nine years in building and refining a risk-based public company auditor oversight program. We will also coordinate closely with the SEC and FINRA and draw on their expertise and long experience.

I believe that the Board will ultimately conclude that the auditors of some significant categories of broker-dealers can safely be exempted from PCAOB oversight without compromising investor protection. But, those decisions, when they are made, will be based, not on speculation, but on empirical information that we gather during the next several years.

Interim Inspection Program

In June, as a step toward answering those kinds of questions, the Board adopted temporary rules for an interim inspection program. The interim program allows the Board to begin reviewing broker-dealer audit work. However, the primary focus of the interim inspections will be on gathering data, including potential benefits to the investing public and potential costs and regulatory burdens, to help the Board structure a permanent inspection program. The Board will issue public reports at least annually on the progress of the interim program and on any significant observations. The Board will also eventually issue firm-specific reports, but those will not be finalized unless and until a firm has also had an inspection in the permanent program.

Armed with information from the interim program, the Board will be in a better position to determine the objectives, nature, and frequency of inspections for different classes of firms; to decide on possible exemptions from oversight; and to defend those determinations and decisions, if they are questioned. You will hear more about how the interim program will operate and how it might affect you later in the day.


In addition to inspections, the other pillar of the broker-dealer auditor oversight program will be new auditing standards. In July, the Board proposed auditing and attestation standards that would establish rules-of-the-road for auditor association with reports that the SEC has proposed to require concerning compliance with the Commission's financial responsibility requirements, including the net capital and customer protection rules.

Unlike public company auditing, the protection that investors derive from the auditor's broker-dealer work results primarily from the auditor's association with compliance-related information outside the financial statements. The examination and review engagements that are the basis for auditor reporting on these matters provide the Commission, FINRA, and investors with independent assurance that customer assets are not exposed to misappropriation or similar risks.

The Board's proposed standards dovetail with the Commission's proposed amendments to Securities Exchange Act Rule 17a-5 and are designed to provide the level of assurance the SEC requires, but without generating unnecessary expense or complexity, especially for smaller firms. The proposed standards are also intended to recognize the diversity of the broker-dealer population. They are explicitly risk-based and structured to be scalable to brokerage firms of different types and sizes. The standards also emphasize that the financial statement audit and the work related to financial responsibility compliance should be coordinated to avoid needless duplication of effort.

The new Board standards are only proposals at this stage. The public comments assert that we have not always met our objectives and suggest improvements. The Board will carefully consider those comments. Early next year, the Board will adopt final standards, and send them to the SEC, which must approve our work, before new standards become effective. Later today, you will hear more about the Board's proposed broker-dealer auditing standards and about the SEC's amendments to Rule 17a-5.


I hope these brief comments about how the Board is approaching its new broker-dealer auditor responsibilities will set the stage for the rest of today's program. I believe that you will hear the themes of investor protection, the importance of tailoring our work to a diverse securities industry, and a focus on information-gathering-before-regulating throughout the presentations.

I also hope you will find the day worthwhile and informative. We want the program to be a two-way street, and look forward to your comments and active participation.

Thanks for attending our forum and thank you for your attention.

* The views expressed are my own, and not necessarily those of the Public Company Accounting Oversight Board, of any other Board member, or of the Board’s staff.

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