PCAOB Dissatisfied with Audit Firms of Broker-Dealers

The Public Company Accounting Oversight Board (PCAOB) recently issued their second progress report on its interim inspection program for auditors of brokers and dealers (BD).  This report covered the period from March to December 2012 and included 43 audit firms performing 60 audits.   Of the 43 firms, 19 were covered during the normal PCAOB inspection as these firms also audited public companies.  The other 24 firms were not subject to PCAOB except for the broker and dealers that that audited.

The PCAOB noted deficiencies in 95 percent (57 of 60) of the audits selected.  The deficiencies most noted related to audit procedures related to the computation of the customer reserve and net capital requirements as well as testing revenues, related party transactions and the risk of material misstatement due to fraud.

Another area which has caused concern is that 22 firms violated the SEC independence rules as they prepared the financial statements for the BDs they audited   (The SEC rules prohibit an audit firm from preparing the financial statements for public companies and brokers and dealers).

Currently, the interim inspection program is a fact gathering mission to determine if there is a need for a permanent inspection program.  The PCAOB anticipates presenting a rule proposal for a permanent inspection program in 2014 or later.

While I agree that the PCAOB needs to beef up its inspection to ensure that audit firms are properly auditing brokers and dealers, when it comes to preparing the financial statement for a BD, I am not sure I see it as an independence issue.

The way the SEC/PCAOB see it, if the audit firm types the financial statements as an accommodation for the broker and dealer, this is an independence violation, even if the BD has a CFO capable of preparing the financial statements but would rather have it look more professional when prepared by the audit firm.

Now if the PCAOB is reading this blog, I want to assure them that we do not prepare the financial statements for any of our BD or public companies.

The partners and staff at WithumSmith+Brown, PC are experienced with the PCAOB and its inspections. For questions, on this specific PCAOB update, do not hesitate to contact your staff or contact partner at WS+B.

– Frank


  1. PCAOB Finds Continuing Problems with Most Broker-Dealer Audits,” Accounting Today, 8/19/2013, http://www.accountingtoday.com/news/PCAOB-Finds-Continuing-Problems-Broker-Dealer-Audits-67775-1.html


1 reply

  1. Definitely scary to the outsider knowing that some and in this case, most have violated regulations put in place by the PCAOB.However I agree that the financial statement isn’t done separately with BD, it wouldn’t be an independence issue. Great post!

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