Last week I posted a column at Forbes: Already Behind The Eight-Ball: Auditors of Broker-Dealers Are A
The Public Company Accounting Oversight Board, the US
audit industry regulator, issued its
first report on the auditors of broker-dealers this week and it was ugly.
The PCAOB inspection team found serious auditing
deficiencies in all 23 audits they reviewed. The PCAOB released the report on
August 18, the first anniversary of the SEC's approval of temporary rules that
gave the regulator the authority, under the Dodd-Frank Reform Act, to require
registration and, therefore, inspection of the auditors of broker-dealer firms,
a majority of which do not audit any other SEC registered companies.
This was the first time most of these firms were
scrutinized by anyone but their peers in the accounting industry.
According to the PCAOB's first report, there are 800
registered public accounting firms that issued audit reports for financial
statements of brokers-dealers for fiscal period 2011 that were filed with the
SEC. Some of these firms audited as few as one broker-dealer, while others
audited over 150 broker-dealers. Approximately 300 of the 800 firms also
reported issuing audit reports for public company issuers. There were
approximately 4,400 broker-dealers that filed audited annual financial
statements for fiscal periods ended during 2011 with the SEC.
As of October 1, 2010, there were approximately 12,000
investment advisors registered with the SEC. There were 2,636 registered
investment advisers that had an affiliated broker-dealer. Investment advisors
are not required to have an independent audit of their financial statements.
However,there is a new auditor attestation required for investment advisors. I
talked about that in my column this week in American Banker regarding the
relationship between private equity firm Bain Capital Partners and PwC.
As of March of 2010, investment advisors like Bain
Capital Partners that have custody of customer funds and securities must hire an
"independent" auditor to do a "surprise" examination. The auditor that
performs the "surprise" examination must be registered with the PCAOB and
subject to its inspections. The PCAOB, however, has no authority to review the
"surprise" examination. And an investment advisor is not obligated to have a
full audit by an independent auditor.
The broker-dealers that were inspected by the PCAOB were
not judged by any new rules. The auditors operate, for now, under generally
accepted auditing standards ("GAAS") issued by the American Institute of
Certified Public Accountants ("AICPA"). The new "surprise" examination of
investment advisors who have custody of customer funds or securities is also
performed under AICPA attestation standards.
Broker-dealer audit firms will soon have to start
auditing those firms under PCAOB standards. One wonders how, given their poor
performance under well-known AICPA standards, how most of them will ever be
able to make the transition and stay in business. From my Forbes column:
The SEC has not yet finalized the rules - 17a5 - under
Dodd-Frank that officially require broker-dealers to use a PCAOB-registered
firm. Broker-dealer auditors are not yet officially required, therefore, to use
PCAOB standards for conducting their audits. The inspections were performed
under GAAS, the AICPA audit standards, since the broker-dealers whose audits
that were reviewed are not public companies. Once the SEC's rules are
approved, all broker-dealers audits will be conducted under the PCAOB audit
SEC spokesperson Judy Burns told me the agency has not
publicly stated when it will adopt the broker-dealer auditor rules under
One very difficult complication is that auditors of
broker-dealers are required to be independent of their clients under SEC rules,
not AICPA rules. AICPA independence rules are more lenient and do not prohibit
auditors from also preparing the financial statements they audit and supporting
firms with accounting software and IT expertise.
Read this article in its entirety at the re: The Auditors, a blog
by Francine McKenna.
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