PCAOB sees improvement in audits of broker-dealers

The Public Company Accounting Oversight Board reported a decline in the number of firms that had deficiencies last year in their audits of broker-dealers, but the rate is still comparatively high.

The report, which the PCAOB produces annually, is based on inspections of firms that audit broker-dealers. The PCAOB found that the number of firms that had one or more audit and/or attestation engagements with deficiencies showed a 14% drop in 2020 compared to 2019, but remained high as a percentage of firms inspected at 78%. The number of audit engagements with deficiencies in 2020 fell 15% from 2019 levels but remained high as a percentage of engagements reviewed (61%), mainly due to deficiencies in auditing revenue.

Generally, the results of inspections of firms that audited more than 100 broker-dealers resulted in lower percentages of audits with deficiencies (38%), compared to the results for firms that audited 100 or fewer broker-dealers (71%).

The PCAOB has focused special attention on audits of broker-dealers, which often show higher levels of problems than audits of public companies. The board has been releasing reports on such audits ever since the financial crisis, in response to the hands-off approach of Bernard Madoff’s former audit firm, which prompted reforms in the Dodd-Frank Act.

The report also found that the percentage of examination engagements with deficiencies declined slightly to 67% of engagements reviewed from 69% in 2019 but remained high, mainly due to deficiencies in testing internal control over compliance. Examination engagements deal with assertions made by broker-dealers in compliance reports. The percentage of review engagements with deficiencies decreased to 23% of engagements reviewed from 51% in 2019. These engagements deal with assertions made by broker-dealers in exemption reports.

“Generally, the results of inspections of firms that audited more than 100 broker-dealers resulted in lower percentages of audit engagements with deficiencies, compared to the results for firms that audited 100 or fewer broker-dealers,” said the report. “For firms that audited more than 100 broker-dealers, the percentage of audit engagements with deficiencies declined to 38% in 2020 from 41% in 2019. For all other firms, the percentage of audit engagements with deficiencies declined to 71% in 2020 from 84% in 2019.”

Along with the annual report, the PCAOB also released a separate publication, Supplementary Information Related to Audits of Brokers and Dealers. It presents comparative data about selected firms and engagements, as well the results of PCAOB inspections, over multi-year periods.

The PCAOB is urging auditors of broker-dealers to consider the observations included in the annual report to spot opportunities to improve the quality of their broker-dealer audit engagements.