PCAOB finds more problems in broker-dealer audits

The Public Company Accounting Oversight Board saw high rates of deficiency when inspecting audits of brokers and dealers last year, with little to no improvement over prior years, according to a new report.

The annual report, released Thursday by the PCAOB, found the deficiency rates usually increased or stayed at a high level across different types of audit engagements involving broker and dealer clients. The findings appear to be in line with the sobering level of significant audit deficiencies reported by the PCAOB last month in previewing its 2022 inspection results for auditing firms overall. PCAOB chair Erica Williams called them "completely unacceptable" (see story).

The PCAOB received authorization to inspect audits of brokers and dealers as part of the Dodd-Frank Act of 2010 in reaction to the lax work of convicted Ponzi schemer Bernard Madoff's auditor, and has since released annual reports on its inspection results. Broker-dealer audits have long been looser than those of large publicly traded companies, and the PCAOB was tasked with making inspections of the firms catering to broker-dealers tougher. However, the PCAOB is finding that quality control seems to be getting worse at the firms.

In its latest report, the PCAOB saw an increase in the percentage of firms it inspected that had deficiencies in their quality control systems, particularly when it comes to engagement performance and specifically engagement quality reviews.

"In last year's annual report, we stated that the overall observed deficiency rates in broker-dealer engagements remained unacceptably high, despite the improvement in 2021 inspection results described in that report," said the PCAOB. "With a few notable exceptions, deficiency rates observed in 2022 inspections generally increased or remained elevated across engagement types and areas."

Last year marked the PCAOB's eighth year of inspections of firms that audit broker-dealers, and the PCAOB said the results were a cause for "significant concern."

The report cites several of the main factors for the high rate of deficiencies in terms of the audit engagement types. There were persistently high deficiencies related to revenue, and increases in deficiencies related to net capital supplemental information, auditors' reports and audit documentation. 

Review engagements also saw increases in deficiencies related to the auditor's consideration of evidence that appeared to contradict statements and assertions included in exemption reports. Review engagements showed increases in deficiencies related to review reports. 

On a positive note, there were some exceptions to the overall trend of high deficiencies, with audit engagements showing decreases in deficiencies related to customer protection supplemental information and going concern opinions.

The report provides a list of "good practices" auditors should follow and recommended actions for firms to address deficiencies. Recommended actions for firms include improving their procedures to evaluate the presentation and disclosure of revenue; and understanding the broker-dealer financial responsibility rules and processes, including the relevant controls. Firms should also encourage all audit reviewers, such as managers, partners and engagement quality reviewers, to perform them with due professional care.

The PCAOB also released a supplementary publication alongside the annual report with extra details about the firms selected for inspection, plus the audit and attestation engagements for broker-dealers chosen for review.