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CPAs auditing Broker Dealers ought to take a hint from the second round of PCAOB inspections

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Results of the PCAOB’s CY12 inspections of 60 broker dealer audits are not a pretty picture.

Every one of the 43 firms contributed at least one deficient audit to the 57 of 60 engagements that had a deficiency. For me, the scary parts of the report are the widespread independence issues and the large number of firms whose involvement in the PCAOB world is performing exactly one BD audit.

Independence troubles

Differences of independence rules between the AICPA and PCAOB SEC caused some serious trouble for smaller firms. While the audit itself is performed under the AICPA SASs, auditors are required to comply with PCAOB SEC independence rules.

That didn’t go well.

Eighty percent of the firms who don’t otherwise audit issuers (i.e. not otherwise subject to the full regimen of PCAOB audit rules) had a deficiency for independence rules.

Here’s the tally of independence deficiencies, audits inspected, and number of firms for the annual inspection firms (largest 9 firms), triennial inspection firms (all others auditing issuers), and firms subjected to interim inspection (who don’t otherwise audit issuers):

  • Defic.  audits  firms    inspection frequency
  •   0          22          9      annual insp.
  •   3          14        10      triennial
  • 19          24        24      interim
  • 22          60        43      total

Ouch. That’s a deficiency rate of 30% for triannually inspected firms and 80% for firms that don’t work with PCAOB rules all the time.

Here’s the PCAOB’s comment on the independence problems:

Inspections staff observed 22 audits, by 22 firms, where the firms performed bookkeeping or other services related to the accounting records or financial statements of the brokers or dealers. All of these firms prepared, or assisted in the preparation of, the financial statements or supporting schedules required by Rule 17a-5. In addition, some of these firms also prepared trial balances or source data underlying the financial statements of the broker or dealer.

Level of experience – performing just 1 BD audit?

The part that really made me nervous is the number of firms who are dabbling in broker dealer audits.

Here’s a table showing how many broker dealer audits are performed by firms:

  • # firms  audits per firm
  • 363       1
  • 293       2 to 5
  • 113       6 to 50
  •     8       51 to 100
  •     6       More than 100
  • 783      Total firms 

I can understand why a firm might only perform 3 or 5 BD audits. Trying to grow a niche, strategic client relationships, or want to have an experienced partner maintain a knowledge base.

But 363 firms performing one BD audit? Really?

Dabbling with one or two of an extremely high risk audit is amazingly dangerous. With just 1 of a kind, the partners and staff can’t have the experiential knowledge of what is common or typical for the industry. Just 1 or 2 specialized audits makes it so tough to justify all the CPE and reading necessary to stay current.

I cringe when I hear of firms that perform 1 pension plan audit, or 1 single audit, or 1 government audit. I shudder when I hear of firms that perform just 1 audit in total.

To take on 1 broker dealer audit, with the risk that the PCAOB will land on your head, is dangerous beyond belief.

If that is part of your business strategy, well, it’s your choice. However, please check out the PCAOB’s advice:

All registered public accounting firms that issue audit reports for SEC-registered brokers and dealers should consider whether the audit deficiencies and independence findings described in this report might be present in audits they currently perform, and should take appropriate action to prevent or correct any such deficiencies.

If you don’t hang out in the PCAOB world all the time, it is imperative you double-check your compliance with independence rules.

You can find a page at the PCAOB’s website discussing the inspections here.

You can get a PDF of their report here.

Two news articles discussing the results are here and hereAs always, Going Concern has the best smart alack editorial comment. In their post, Auditors of Broker-Dealers Are Letting Us All Down, they said:

COME ON, YOU GUYS. You’re making EY look really good and that is no small feat. 

Written by Jim Ulvog

August 27, 2013, 8:45 am at 8:45 am

Posted in Audits

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