By John Cavallone and David Grumer

The accounting profession will feel the impact of the Sarbanes-Oxley Act of 2002 in many ways. Most professionals are concerned about the effects that the Act will have on the audits of their publicly held clients. However, one aspect of the Act that has emerged, albeit with less fanfare, are the audits of privately held brokers and dealers in securities.

The Act only requires public accounting firms that prepare or issue reports on “Issuers,” as the word is defined in the Act, to register with the Public Company Accounting Oversight Board (PCAOB). However, Sarbanes-Oxley also amends the Securities Exchange Act of 1934 so that broker-dealers that are required to file annual audited financial statements with the Securities Exchange Commission must have those financial statements audited by a “registered public accounting firm.”

The PCAOB acknowledges that there are a number of firms that do not audit Issuers but that do audit at least one broker-dealer. Presently, the PCAOB has indicated that its inspection programs of registered public accounting firms will take into account the nature of practices such as these, but the specifics have not yet been worked out by the newly created regulatory body.

Small accounting firms that register should direct their attention to Section 203 of the Act for the rule on partner rotation and should check to see if they qualify for an exemption that may apply to their practice (see SEC Release 33-8183, part II.C.4., titled “Small Business/Small Firm Considerations”). In addition, when preparing Form 1–Application For Registration, registrants should keep in mind that the information in Part II titled “Listing of Applicant’s Public Company Audit Clients and Related Fees” is for information about clients who are Issuers (exactly as the term is defined in the Act) and doesn’t apply to the privately held broker-dealer.

Expense Sharing Agreements

At the May 20 Foundation for Accounting Education’s Securities Industry Conference, representatives of several regulatory organizations indicated that “expense sharing agreements” would be the subject of a published rule. The SEC has since issued its interpretive letter, dated July 11, 2003, on the topic. These agreements have been used in the past as a means of allocating liabilities to affiliates and, in the process, to strengthen regulatory net capital. The objective of the guidance included in the letter is to cure abuses of the practice.