AICPA Monitoring PCAOB Forums for Auditors of Smaller Broker-Dealers

September 20, 2012

The American Institute of CPAs continues to advocate for a final Public Company Accounting Oversight Board (PCAOB) rule requiring inspections of auditors of clearing, carrying and custodial broker-dealers and has staked out a strong position opposing inspection of auditors of introducing broker-dealers.  The AICPA’s position is based on the fact that clearing, carrying and custodial broker-dealers have direct access to client assets and such an inspection program is likely to result in the biggest benefit to the public.  The AICPA has submitted numerous comment letters to Congress, the U.S. Securities and Exchange Commission, the PCAOB and various industry publications expressing its position. 

In order to lessen the possibility that another Madoff-type theft could occur, Congress, in the Dodd-Frank Act, granted broad new authority to the PCAOB to expand its mission beyond regulating the auditors of public companies.  Under the Act, the PCAOB has the authority, by rule, to set up an inspection regime for auditors of broker-dealers.  In the rule, the PCAOB may choose specific classes of broker-dealer auditors or mandate that all auditors of all broker-dealers be subject to inspection and registration.  Lawmakers have explicitly indicated to the PCAOB that it should consider the various benefits and risks to investors, auditors and broker-dealers, as it considers any potential rule.

In June of 2011, the PCAOB adopted a rule to create a temporary inspection program of all auditors of broker-dealers.  Since the PCAOB rule will not be final until 2013, the AICPA continues to voice its belief that auditors of introducing broker-dealers should be excluded from the PCAOB’s oversight.  It is the AICPA’s view that until the scope of the PCAOB final inspection rule is determined, PCAOB audit standards should not apply to auditors of non-public broker-dealers. 

“We are convinced that the SEC should not require that the audits or attestation reports for non-public broker-dealers reports be performed in accordance with PCAOB standards until the PCAOB has established the scope for its permanent inspection program,” the AICPA wrote in a April 30, 2012 letter to the PCAOB signed by Susan S. Coffey, CPA, AICPA senior vice president – public practice and global alliances.  “We similarly contend that requiring auditors of non-public broker-dealers to follow PCAOB quality control, ethics and independence standards is not warranted until decisions with respect to a final, permanent inspection program’s scope are reached.” 

Following the issuance of its rule, the PCAOB kicked off a series of one-day public forums in the fall of 2011 for auditors of smaller brokers and dealers who are registered with the PCAOB.  The PCAOB forums provide an opportunity for registered public accounting firms operating in the smaller broker-dealer community to interact with PCAOB Board members and staff and to learn more about the PCAOB.  The forums also enable the PCAOB to hear the comments and concerns of auditors working with smaller brokers and dealers.

The PCAOB has held four forums to date and plans to hold two more this fall – one on Oct. 25 in Jersey City, N.J. and one on Nov. 8 in San Diego, Calif.  The AICPA has made a point of having staff and interested members attend these forums to glean information regarding the likely direction the PCAOB will take after it completes its interim inspections and moves towards a permanent final rule.  The AICPA will be in attendance at the two upcoming forums, as well. 

The AICPA members and staff attending the past PCAOB broker-dealer forums learned that in 2011, as part of interim inspection, PCAOB inspected eight registered accounting firms and examined portions of 19 broker-dealer audits.  The PCAOB staff anticipated inspecting over 40 firms in 2012 and examining portions of about 60 broker-dealer audits.  The PCAOB issued its first annual broker-dealer inspections findings report in August 2012. That report covered 23 audits of broker-dealers performed by ten registered accounting firms, out of approximately 4,400 audits conducted by over 800 audit firms.  The PCAOB identified deficiencies in each of the audits selected for inspection.  The report points out that seven of the 10 inspected firms do not audit public companies and, accordingly, are not otherwise subject to inspection by the PCAOB.

While the PCAOB recognizes in the report that its findings cannot be generalized to all broker-dealer audits, the accounting profession takes seriously the results of PCAOB's interim inspection program related to the audits of broker-dealers.  In addition to the efforts that take place on an individual firm basis, the AICPA, the Center for Audit Quality and individual accounting firms are engaged in a profession-wide effort to identify additional ways the profession can enhance audit quality and investor confidence in the integrity of audited financial statements.

PCAOB observations from its interim inspections and feedback from these forums will assist the PCAOB in determining the appropriate scope of its permanent inspection rules and which broker-dealers should comply with PCAOB standards.  The forums will also help the PCAOB to understand and consider the unique needs and challenges of the auditors of smaller broker-dealers and their clients in its inspection and standard-setting process.

For information about the AICPA’s efforts concerning the registration and inspection of the auditors of broker-dealers, see the broker-dealer page in the advocacy area of the AICPA’s website.