Financial authorities on Monday reported wide-ranging deficiencies in the audits of broker-dealers, finding that many accounting firms have too close a relationship with the subjects of their evaluations.

The Public Company Accounting Oversight Board issued its interim report as it is developing a permanent set of rules to govern the auditing procedures for SEC-registered broker-dealers in an aim to bring that sector more in line with the examinations common to publicly traded companies.

All 43 firms that the PCAOB evaluated were cited for an auditing deficiency. They found fault with 95% of the individual audits that came under review.

"The inspection results," says PCAOB board member Jay Hanson, are "in one word, disappointing."

Specifically, PCAOB identified violations of the SEC's independence rules in more than one-third of the audits the organization reviewed, often finding that the audit firm was also responsible for preparing the broker-dealer's financial statement.

Of the 43 firms that PCAOB evaluated for its interim report, 19 were already subjected to regular oversight by the board because they also audit public companies. The remaining firms that only audit broker-dealers accounted for approximately 80% of the independence deficiencies PCAOB cited in their audits.

"Some of these deficiencies are relatively fundamental concepts of auditing," says Robert Maday, program leader of PCAOB's broker-dealer inspections program.

In July, the SEC approved a series of amendments to the reporting and audit rules for broker-dealers stipulating that audits be conducted in accordance with PCAOB standards beginning with fiscal years that end June 1, 2014. PCAOB began the interim review of broker-dealer audits in August 2011, acting under new authorities conferred by the Dodd-Frank Wall Street reform law.

PCAOB has scheduled the first of two planned forums to discuss the proposed oversight framework in Jersey City, N.J., on Oct. 31, with the second slated for Nov. 20, in Las Vegas.

The board issued its first evaluation of broker-dealer audits in 2012, finding then, as in today's report, that the outside audits were almost uniformly deficient. "Same song, second verse," Hanson says.

PCAOB evaluated the firms described in today's report between March and December of 2012. Throughout the course of this year, the board intends to inspect 60 firms and portions of 90 individual audits, bringing the totals for the broker-dealer interim review process to 100 firms and 170 audits.

Among the other deficiencies the board cited were inadequate procedures for calculating customer reserve and net capital, as well as an excessive risk of fraud-related material misstatement.

"This isn't just a compliance exercise," Hanson says. "To the extent that a firm has an audit committee, they should be very concerned about this."