Inspections continue to find deficiencies in audits of broker-dealers

The PCAOB on June 28, 2017, released a preview of the inspection results of broker-dealer auditors.

The Staff Inspection Brief covers inspections carried out in 2016, and the PCAOB continued to find problems with independence as auditors were involved in the preparation of the financial statements or accounting records of their audit clients.

“Auditors must be independent of their audit clients throughout the audit and professional engagement period,” the 13-page staff brief noted.

PCAOB Rule 3520, Independence, requires registered accounting firms to be independent of their audit client. They also must comply with the SEC’s independence criteria established in Rule 2-01 of Regulation S-X.

“An auditor is not independent of its client, including its broker or dealer client, if the auditor maintains or prepares the client’s accounting records, prepares the client’s financial statements that are filed with the SEC, or prepares or originates source data underlying the client’s financial statements,” the PCAOB brief said.

The PCAOB staff inspected 75 accounting firms, covering parts of 115 audit and attestation engagements for fiscal years that ended during the period from June 30, 2015, through June 30, 2016. There were 541 accounting firms that issued audit reports of 3,958 broker-dealers.

The PCAOB inspections staff also continued to find deficiencies in audit areas similar to previous inspection cycles, including revenue recognition, financial statement presentation and disclosures, and the assessment of risks of material misstatement due to fraud. A detailed summary of the inspection results for 2016 will be published in August, but in 2015, the PCAOB staff, for example, cited problems in auditing a client’s revenue in 70 percent of the audits inspected.

Last year, the PCAOB said broker-dealer auditors, among other things, had trouble evaluating the design of client’s internal controls intended to address fraud risks, contributing to deficiencies in testing revenue.

“This preview of 2016 inspection results may benefit auditors of broker-dealers as they plan and perform future audits,” Helen Munter, PCAOB’s Director of Registration and Inspections, said in a statement.

The board also found that auditors did not sufficiently assess related-party transactions under PCAOB Auditing Standard (AS) 2410, Related Parties, formerly AS 18, which sets out the requirements for an auditor evaluating a client’s accounting and disclosures for transactions that involve its directors and executives.

Related parties often play a significant role in the operations of broker-dealers through shared-service or expense-sharing agreements.

Moreover, PCAOB inspectors observed that auditors did not sufficiently verify a broker-dealer’s supporting schedule containing net capital and reserve requirement that accompanied the financial statements. Auditors also had deficiencies examining broker-dealer compliance reports.

The PCAOB is examining auditors of broker-dealers under an interim inspection program laid out in 2011 in Release No. 2011-001, Temporary Rule for an Interim Inspection Program for the Audits of Brokers and Dealers.

The board is working on a rule proposal to set up a permanent program as authorized by the Dodd-Frank Act. Sec. 982 of PL111-203

For more information on this topic, or to learn how Baker Tilly accounting and assurance specialists can help, contact our team.


We have partnered with Thomson Reuters to issue our monthly SEC Accounting Update. Please feel free to contact Baker Tilly at accounting@bakertilly.com if you have any questions related to these articles or Baker Tilly's Accounting and Assurance Services. © 2017 Thomson Reuters/Tax & Accounting. All Rights Reserved.