PCAOB seeing numerous problems in broker-dealer audits

The Public Company Accounting Oversight Board reported Friday it uncovered a high rate of deficiencies last year in firms that perform audits of broker-dealers similar to 2020, but there were signs of improvement in terms of audit engagements and quality control systems.

The proportion of inspected firms where the PCAOB identified one or more audit and/or attestation engagement deficiencies remained high at 78% in 2021, which was consistent with 2020, according to the report. However, the percentage of audit engagements reviewed where the PCAOB identified deficiencies fell to 49% in 2021, from 61% in 2020, but remained high, mainly due to deficiencies associated with auditing revenue amid the pandemic. 

The PCAOB has beefed up its inspections of audit firms that cater to broker-dealer clients since the financial crisis of 2008-09 and now issues annual reports to prevent situations like the small firm used by the late Bernard Madoff that performed few actual audits. Under the Dodd-Frank Act of 2010, it was authorized to establish an inspection program for auditors of broker-dealers and began those inspections in 2011.

The percentage of firms inspected where the PCAOB identified deficiencies in quality control systems declined to 48% in 2021, from 66% in 2020, with the majority of deficiencies in both years relating to engagement quality reviews. 

The PCAOB inspections found that firms that audited 100 or fewer broker-dealers had higher percentages of audit engagements with identified deficiencies, compared to the results for firms that audited more than 100 broker-dealers. 

"For firms that audited 100 or fewer broker-dealers, the percentage of audit engagements with identified deficiencies declined to 60% from 71% in 2020 and 84% in 2019," said the report. "For firms that audited more than 100 broker-dealers, the percentage of audit engagements with identified deficiencies declined to 32% in 2021 from 38% in 2020 and 41% in 2019. The percentage of examination engagements covered where we identified one or more deficiencies declined slightly, to 64% of engagements in 2021 from 67% in 2020, but remained high, primarily due to deficiencies in testing internal control over compliance."

The percentage of review engagements where the PCAOB identified one or more deficiencies increased to 28% in 2021 from 23% in 2020. 

Along with the annual report, the PCAOB also released a separate supplement containing information related to audits of brokers and dealers. The document provides information about firms selected for inspection, along with audit and attestation engagements for broker-dealers selected for review, in 2021 and prior years. The PCAOB also provided supplementary information about the results of its inspections stratified by different firm, inspection and broker-dealer characteristics.