PCAOB Sees 'Unacceptably High' Problems in Broker-Dealer Audits

The Public Company Accounting Oversight Board is continuing to find a high degree of problems in audits of broker-dealers, despite some improvements, according to PCAOB member Jeanette Franzel.

Speaking at a PCAOB forum last week in Chicago, Franzel discussed the results of the board’s efforts to inspect the auditors of broker-dealers.

“Although we are seeing some improvements in the number of inspected audits with independence problems and certain types of audit deficiencies when comparing 2013 results to prior years’ results, the number of inspected audits with these types of observations remains unacceptably high,” she said. 

Franzel noted that the PCAOB is likely to extend an interim inspection program as broker-dealers and their auditors transition to and implement the PCAOB’s new rules and standards (see PCAOB Approves New Broker-Dealer Audit and Attest Standards). The PCAOB was given more ability to inspect audits of broker-dealers as part of the Dodd-Frank Act of 2010 in response to the outcry over the lack of audits of securities firms such as Bernard Madoff’s.

Franzel said the PCAOB staff plans to issue staff guidance for audits of smaller broker-dealers in the near future to help firms transition to the new PCAOB standards, which are effective for audits of financial statements with fiscal years ending on or after June 1, 2014. 

The PCAOB has been providing updates on the results of its inspections of audit firms that service broker-dealers and uncovered troubling results (see PCAOB Finds Continuing Problems with Most Broker-Dealer Audits).

The results for all three years that the PCAOB has been inspecting the audits of broker-dealers show a high number of negative observations.

“They include apparent independence violations, in which auditors were involved in the preparation of the financial statements that they audited,” said Franzel. “As with issuer auditors, the auditors of broker-dealers have been —and continue to be—are required to be independent.”

Other problems include deficiencies related to the other requirements of Rule 17a-5, such as customer protection and the net capital rules. The PCAOB is also finding deficiencies in the audit work for the financial statements, Franzel noted.  

“Many of the observations from the inspections conducted in 2013 are similar to those from inspections in 2011 and 2012,” she added. “Although we are seeing some improvements in the number of inspected audits with independence problems and certain types of audit deficiencies when comparing 2013 results to prior years' results, the number of inspected audits with these types of observations remains unacceptably high.”

Many of the observations relate to the application of fundamental auditing procedures, Franzel pointed out. “Firms need to take steps to improve the quality of their broker-dealer audits to achieve compliance with applicable rules and standards and the overall goals of protecting investors and the public interest,” she said. “As part of our interim inspection program, information from our inspections may lead to investigations or disciplinary proceedings concerning the conduct of the audit firm or associated persons of such firms. Information related to possible violations of laws or rules, including independence rules, by broker-dealers may be, and have been, reported to the SEC and other regulators.”