PCAOB Finds Major Problems in Broker-Dealer Audits

Chris Gaetano
Published Date:
Aug 22, 2016

The Public Company Accounting Oversight Board's latest inspections on broker-dealer audits has revealed a 77 percent deficiency rate--and as high as that is, it's still an improvement over the 87 percent rate from the last round of inspections in 2014. The inspection looked at 75 firms and covered portions of 115 audits and 114 related attestation engagements. The PCAOB said that the 2015 inspections took place in the first annual cycle in which all auditand related attestation engagements were required to be performed in accordance with PCAOB standards and amended Exchange Act Rule 17a-5 and the first annual cycle in which the new attestation engagements were included in the inspections. 

Revenue was the most frequent source of auditing deficiencies, appearing in 70 percent of audits inspected. Auditing related to the Customer Protection Rule was the second highest source of deficiencies in this area, being found in 53 percent of the applicable audits. The third largest trouble spot was related parties transactions, found in 32 percent of inspected audits. Finally, 30 percent of PCAOB-inspected audits had problems regarding audits of the Net Capital Rule, including a high number of deficiencies related to auditing the securities haircuts component of net capital computation. 

When it came to audits of attestation engagements, 78 percent had deficiencies relating to the examinations of a broker or dealer's compliance report and 34 percent had problems regarding the broker or dealer's exemption report. 

The PCAOB also found problems in engagement quality reviews. First, it found that for seven audits and seven attestation engagements, there was no engagement quality review at all. It also found deficiencies in 57 percent of audit quality reviews, 48 percent of attestation engagement reviews and 34 percent of exemption report reviews. 

"The Board continues to be concerned by the nature and consistently high number of deficiencies across the firms and the audits covered by the inspections. Many of these
deficiencies continue to be similar in nature to those described in previous reports and relate to the fundamentals of auditing that are not necessarily dependent on whether the audit was performed under generally accepted auditing standards ("GAAS
") or PCAOB standards," said the PCAOB report. "Many of the inspected firms need to significantly improve their audit work to meet the requirements of the professional standards and SEC and PCAOB rules. The Board is also concerned by the nature and number of deficiencies in the attestation engagements across the firms inspected." 

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