PCAOB broker dealer audit reviews of 2014 show above normal deficiency results

CALABASAS, Calif. - Oct. 6, 2015 - PRLog -- Surprising results from PCAOB broker dealer audit reviews of 2014 show above normal deficiency results across many audit firms in the industry.

Under SEC Independence rules; the assigned PCAOB auditor cannot also prepare your audit report, submit changes to your financials, or help in preparing your examination assertion.

As the broker-dealer industry remains increasingly complex, new rules and regulations are issued to combat illegal activities and regulate rogue brokers. Regulations affect every broker-dealer, large and small adding the greatest burden on small broker-dealers who struggle to hire and retain the level of expertise needed for compliance. As a result, more broker-dealers are reaching out to compliance firms for guidance.

Legislation now requires non-public broker-dealers to use an audit firm registered with the Public Company Accounting Oversight Board (PCAOB) to conduct their audit. PCAOB oversight will help ensure that audits of broker-dealers will be properly performed.

In July 2013, the SEC amended its Rule 17a-5 to require audits of broker-dealers' financial statements and supplemental information, as well as the auditor's examination of the compliance report or the auditor's review of the exemption report, be conducted in accordance with PCAOB standards. Before the SEC amendments to Rule 17a-5, audits of brokers and dealers were required to be performed under generally accepted auditing standards established by the American Institute of Certified Public Accountants (AICPA).  Now that PCAOB is in charge, independence takes a greater precedence.

Review of 2014 audits tells us that almost nine in ten audits of broker/dealers examined have deficiencies, according to the recent Public Company Accounting Oversight Board report, and almost a quarter had independence issues. With this in mind, the board plans to increase the number of firms inspected by 14 percent in 2015, and is working toward establishing a permanent inspection program.

Taking a look at the numbers

Annual report results at December 2014 show that of 106 audits, 26 had independence findings and there were audit deficiencies in all of the 66 firms inspected. Deficiencies were noted as especially high for audit firms that do not also handle issuer audits.

Robert Maday, PCAOB program leader for Broker-Dealer Audit Firm Inspections urges broker dealer audit firms to re-examine their audit approaches due to ongoing issues identified during inspections.

Areas of concern:

Financial Statement Deficiencies: A deficiency, as defined by the PCAOB, means the audit firm hadn’t obtained enough evidence to support its approvals of a company’s financial statements and internal controls. Among types of deficiencies in statements related to controls are; A deficiency in design, a deficiency in operation, a significant deficiency, a material weakness leading to a reasonable possibility that a material misstatement is not detected.

Auditor independence (PCAOB Rule 3520):  A registered public accounting firm and its associated persons must be independent of the firm's audit client throughout the audit and professional engagement period. The rule safeguards auditors independence, objectivity and professional skepticism through mandatory rotation of audits. Additionally, the rule helps limit pressure on auditor’s to develop and protect long-term client relationships to the detriment of investors and capital markets.

Looking forward to 2015 here is what we can expect from PCAOB inspections -

In an ongoing effort to identify focus areas for PCAOB inspections, the PCAOB released a staff inspection brief.  The inspection brief states 2015 PCAOB inspections will focus on:

·         The examination of compliance reports and the review of exemption reports under newly applicable PCAOB standards,

• Financial statement audit areas that had deficiencies identified in past inspections, including revenue recognition and use of information produced or used by broker-dealers,
• Audit procedures on the supplemental schedules to the financial statements,
• The engagement quality review, and
• Auditor independence

For more information about PCAOB Audits, download our PCAOB broker-dealer audit newsletter:  http://www.davebanerjee.com/pcaob_audit.php

Dave Banerjee, CPA is a dedicated professional CPA with over 30 years experience in the securities industry.   His extensive knowledge is supported by a team of veteran CPA’s, FINRA experienced examiners, MBA’s, and compliance specialists that are highly trained with well-rounded backgrounds.  Under Dave’s leadership the firm conducts PCAOB audits, FINOP, and tax services for small to mid-size broker dealer firms.  Dave has been a FINRA member since 1989 and presently holds licenses: series 4, 7, 24, 27, 53, 55, 63, 65, 79, 99.