PCAOB Pilot Program to Inspect Firms That Audit Broker Dealers

A couple of years ago, a gentleman by the name of Bernie Madoff, “made off” with lots of people’s money, around $65 billion, give or take a few billion.  His accountant was, for all intents and purposes, a sole practitioner. 

Public perception was, “How can a small CPA firm audit such a large fund?”  The answer is: it can’t and of course we know now, it didn’t.

The knee-jerk reaction was the passage by the regulators to require all CPA firms auditing broker-dealers (“BD”) to be registered with the Public Company Accounting Oversight Board (“PCAOB”).

The PCAOB is charged with performing inspections of CPA firms that audit companies that have their stock publicly traded.  These inspections occur every three years for firms that audit a small number of public companies, whereas firms that audit a large number of public entities may have annual inspections (the “Big 4” for instance).

When the PCAOB inspects a firm, it will only inspect the workpapers for the public entities, not the privately held entities.  Most BDs are privately held, as was Mr. Madoff’s.  I am sure you see where I am going with this…

Since the PCAOB was not going to inspect CPA firms that audited BDs and private companies only, the PCAOB would never inspect that CPA firm’s practice.  So, practically all firms auditing BDs registered with the PCAOB without any fear of inspection or repercussions.  This defeated the purpose of having CPA firms register with the PCAOB, and the problem was not solved.

Now, under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the PCAOB was given the authority to inspect CPA firms that audit BDs.  The PCAOB has decided to run a pilot program to inspect, on a totally confidential basis, 100 CPA firms of varying sizes to get a better understanding of the types of BDs being audited and the quality of the work being performed.  The PCAOB will then make an assessment of whether it will roll BD audits into its formal inspection process.

I have heard from one CPA firm that was recently inspected by the PCAOB under this program. I had actually performed this firm’s peer review last year. I selected one BD to review. It turns out it was one of the two that the PCAOB inspected this year.

The PCAOB sent two inspectors for two weeks to review two small introducing brokers (brokers that do not carry customer accounts – the plain vanilla of BDs).  Yes, you read correctly: two people, two weeks (160 hours).  The firm only spent a total of 60 hours performing these audits. You do the math. 

Funny, I didn’t spend anywhere near those hours performing the peer review and the PCAOB had the same conclusion I did, which was that this firm did a good job.

So to all your firms out there auditing BDs, beware… the PCAOB is coming. And to the BDs out there, make sure your CPA firm is aware of this and check with them that they don’t decide to resign from the PCAOB.


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