The Public Company Accounting Oversight Board has released a new report showing that auditors of brokers and dealers who were inspected last year continued to have a high number of problems with independence and audit deficiencies.

The report is the third in a row that found problems with audits of broker-dealers since the PCAOB was given an expanded mandate for inspecting them under the Dodd-Frank Act of 2010, in response to the Bernard Madoff scandal.

Although the percentage of audits with inspection observations was slightly lower than in previous inspections, the PCAOB expressed concern over the nature and number of these continuing observations.

In its third progress report on the interim inspection program for auditors of broker-dealers registered with the Securities and Exchange Commission, the PCAOB identified audit deficiencies or independence findings in 56 of the 60 audit firms inspected, and in 71 of the 90 audits inspected. Audit deficiencies were found in portions of 70 of the 90 audits, according to the board. Independence findings were found in 21 on the 90 audits, where firms helped with the bookkeeping or preparation of the financial statements they audited, contrary to SEC rules.

The most frequent audit deficiencies were noted in financial statement audit areas, including auditing revenue recognition, the auditor's response to the risk of material misstatement due to fraud, and audit procedures to rely on records and reports from service organizations, as well as areas specific to the audits of broker-dealers, including auditing the net capital computation and the audit work performed for the auditor's report on material inadequacies.

"Many of the observations noted during 2013 have not changed from prior inspections and relate to fundamental auditing principles," said Robert Maday, deputy director of the PCAOB’s Division of Registration and Inspections and Program Leader of the Broker-Dealer Firm Inspections Program, in a statement Monday. “We again urge firms that audit broker-dealers to re-examine their audit approaches and we remind firms that independence rules applicable to broker-dealer audits prohibit bookkeeping or financial statement preparation by the auditor."

Audit deficiencies or independence findings were identified in portions of 151 of the 173 audits selected for inspection (87 percent), since the start of the interim program, the PCAOB noted. The 22 audits without observations came from 12 firms, of which 11 also audited public companies.

Independence findings were found in 45 of the 173 audits selected for inspection (26 percent). Inspection staff noted a significant portion of these findings, 89 percent, came from the firms that did not audit public companies.


Overall, PCAOB inspectors said they saw a high percentage of observations across the firms inspected, whether or not the firm audited public companies, and regardless of how many broker-dealer audits were performed by the firm. The results also were high across the broker-dealer audits selected, regardless of the broker-dealer's reported net capital, revenues and assets, or whether it claimed to be exempt from the customer protection rule.

Of particular note, observations were identified in 100 percent of audits selected for inspection for auditors with only one broker-dealer audit client, while the percentage was only slightly lower (92 percent) for firms that audited two to 100 broker-dealers, but even lower (63 percent) for firms that audited more than 100 broker-dealers.

In addition, firms that also audited public companies had a lower percentage of audits with observations (78 percent) than firms that did not (99 percent).

Generally, there did not appear to be a discernible trend between the percentage of inspection observations and broker-dealer characteristics, other than a lower percentage of findings for audits of broker-dealers that did not claim to be exempt from the customer protection rule (79 percent) compared to those that did (90 percent).

The PCAOB noted that the firms and audits inspected, and the observations made, are not necessarily indicative of the total populations of firms and of broker-dealer audits.


Inspections are well underway for 2014. The report noted that the PCAOB plans to inspect approximately 60 audit firms covering portions of about 100 audits. The inspections will include firms and audits where observations were found in previous inspections. Inspectors also will evaluate whether, or how, firms addressed audit deficiencies or independence findings.

Next year, the PCAOB also intends to continue its interim inspection program. Audits selected for these inspections will have fiscal years ending on or after June 1, 2014, and will thus be required to adhere to PCAOB standards.

The PCAOB said it is also taking a careful and informed approach in developing the scope of a permanent inspection program. The board continues to evaluate the risk of loss to customers of broker-dealers and, in this regard, plans to review new broker-dealer compliance and exemption reports and the respective auditors' reports.

The PCAOB said it anticipates issuing a proposal for a permanent inspection program in 2016, which will include a consideration of whether to exempt any category of registered firms from the program.

The board has a number of other initiatives for broker-dealer auditors, including its Forums on Auditing Smaller Broker-Dealers. The PCAOB also recently issued Staff Guidance for Auditors of SEC-Registered Brokers and Dealers.

The PCAOB reminded auditors that the information obtained through inspections may lead to PCAOB investigations or disciplinary proceedings, or referral by the board to the SEC and other regulators.

The interim inspection program was established in August 2011 in response to the PCAOB’s new oversight responsibility over auditors of SEC-registered broker-dealers authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The PCAOB issued its first progress report in August 2012, and its second progress report in August 2013. A fact sheet on the third progress report is also available.

Michael Cohn is the editor-in-chief of

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