The Public Company Accounting Oversight Board’s (PCAOB) first report on the interim inspection program for auditors of brokers-dealers registered with the Securities and Exchange Commission (SEC) has uncovered some “disturbing” results, the board says.
The 25-page report, released Monday, covered an initial group of 10 audit firms and 23 broker-dealer audits. PCAOB started its interim inspection program last August in response to the board’s new oversight authority over broker-dealer auditors provided in the Dodd-Frank Wall Street Reform and Consumer Protection Act. Congress decided to give PCAOB more oversight authority following Bernie Madoff’s Ponzi scheme.
In its first look, carried out from October 2011 to February 2012, PCAOB says its inspectors “identified deficiencies in all of the audits inspected.” On a conference call with reporters to discuss the findings, PCAOB member Jeanette Franzel said that “Even with this small group of audits inspected thus far, the results are disturbing.”
Said Franzel: “While the auditors and audits selected are not representative of all broker and dealer audits and their auditors, the results are of concern to the board” and “indicate that in the audits that we inspected, the auditors were not properly fulfilling their responsibilities to provide an independent check on brokers’ and dealers’ financial reporting and compliance with SEC rules.”
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Jay Hanson, another PCAOB member, said on the call that the audits selected for the first report included broker-dealers with a net capital under $1 million. “It is a start,” Hanson said. “When we complete our inspection of a cross-section of about 100 firms and 170 audits,” through 2013, “we will have a better picture to share with you of the state of compliance among audits of all broker-dealers.”
In 2012, PCAOB plans to inspect approximately 40 firms and 60 audits.
Franzel said the deficiencies from the first round of inspections fell mainly into three categories: audit procedures for customer protection and net capital requirements, audits of financial statements, and auditor independence requirements.
In 21 of the 23 audits, PCAOB inspectors said they found that “auditors failed to perform sufficient audit procedures to provide reasonable assurance that any material inadequacies would have been found in the accounting system internal accounting controls, and procedures for safeguarding securities.”
Violations were also found under the SEC’s customer protection rule, Rule 15c3-3, which is designed to protect customers by requiring broker-dealers to segregate customer securities and cash from the broker’s or dealer’s proprietary business activities.