Independent broker/dealer advocates are urging Congress to rethink a proposed amendment that will expand the Public Company Accounting Oversight Board’s (PCAOB) authority to regulate auditors at private broker/dealers. Doing so will dramatically raise the audit costs for smaller broker/dealers, says the National Association of Independent Broker/Dealers (NAIBD).

The PCAOB was created in 2002 to regulate accounting firms auditing public companies. The creation was a reaction to a number of corporate and accouting scandals including those affecting Enron and Worldcom. If lawmakers pass the newly proposed bill, the PCAOB’s authority would be expanded to included auditors of private broker/dealers in addition to public ones.

Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, introduced the bill H.R. 1212 in late February, saying the legislation would close a loophole that allowed fraudster Bernard Madoff to avoid detection. Had the PCAOB’s oversight been extended to smaller private auditing firms like the one used by Madoff’s company, regulators could have been able to mitigate victims’ losses, Kanjorski argued.

“If this legal loophole had not existed, Bernard Madoff’s storefront auditing company would have had to register with the PCAOB. Inspection and examination of Mr. Madoff’s accountant by the PCAOB could have identified his Ponzi scheme much earlier,” Kanjorski said.

Representatives from the NAIBD met with a member of Kanjorski’s staff on March 24 to debate the proposed bill. The association says lawmakers should not umbrella all broker/dealers, saying not all firms carry the same risks and that the provision will force unnecessary additional labor and costs.

“Painting all broker/dealers with such a broad stroke creates unnecessary work for the auditors and dramatically increases audit costs for smaller firms,” said NAIBD representative Jim Williams. “I believe that the legislators and their staff were appreciative of the suggested amended language and we’ll keep doing whatever we can to ensure our members’ voices are heard.”