Broker-Dealer Audits Still Badly Broken

Broker-Dealer Audits Still Badly Broken

 On August 19, 2013, the Public Company Accounting Oversight Board, the audit industry regulator, released its second report on its interim inspection program for auditors of brokers-dealers registered with the Securities and Exchange Commission.

The PCAOB’s second “progress” report found deficiencies in all of the audit firms inspected and in 57 of the 60 audits inspected. The Board’s first interim progress report in August 2012 reviewed ten audit firms covering portions of 23 audits. Deficiencies were also identified in all of the audits inspected at that time.

That’s not much progress.

Violations of auditor independence rules were rampant, found in more than one-third (22 of 60) of the audits selected for inspection this time. The PCAOB inspections staff found, in particular, that auditors had violated independence rules by performing services for clients prohibited under SEC independence rules. For example, audit firms prepared the financial statements the firm was paid to “independently” audit on behalf of customers and investors.

Until now audits of the broker-dealer have been performed under AICPA standards. This goes for even the public companies such as Goldman Sachs and JP Morgan where the rest of the audit is performed according to PCAOB standards – that is, the ones now required by the Sarbanes-Oxley Act. And on July 30, 2013, the SEC finally approved amendments to Exchange Act Rule 17a-5 required by the Dodd-Frank Act. These amendments include the requirement that the audits of brokers and dealers must be conducted in accordance with PCAOB standards for fiscal years ending on or after June 1, 2014.

It’s no wonder that auditors, even of these large public companies, were confused about independence.

Well, not really.

One year ago, in Forbes on August 22, 2012, I published Already Behind The Eight-Ball: Auditors of Broker-Dealers Are A Disaster. That was followed up with a post on this blog on August 30, Four Years After Madoff, Audits and Auditors of Broker-Dealers Still Lousy.

Read this article in its entirety at the re: The Auditors, a blog by Francine McKenna.

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