Broken Dealer Audits: Accounting Deficiencies Uncovered By The PCAOB


The Public Company Accounting Oversight Board (PCAOB), the United States audit industry regulator, is supervised by the Securities and Exchange Commission. Last year, the PCAOB established an interim program to inspect the audits of broker-dealers.

This program was long overdue and one of the steps taken to increase brokerage oversight after the Bernie Madoff scandal, where a multi billion-dollar Ponzi scheme went undetected for decades.

On August 18, 2012 the PCAOB released its first interim inspection report via a press release with its findings. The report was on the first anniversary of the SEC’s approval of temporary rules under the Dodd-Frank Reform Act which made the auditors of broker-dealer firms subject to inspection.

Summary of the PCAOB Interim Inspection Report on broker-dealer audits

The report documented serious auditing deficiencies in all 23 audits they reviewed. The PCAOB found that in the small sample of audits they reviewed the firms fell short of their obligations in many areas, including:

  • Audit procedures related to the computations of customer reserve and net capital requirements
  • Audits of financial statements
  • Auditor independence

In 13 of the 23 audits, inspectors found that firms “did not perform sufficient procedures to identify, assess, and respond to the risks of material misstatement of the financial statements due to fraud.”

In ten of the 23 audits, inspectors found that firms “did not perform sufficient procedures to identify the existence of related parties and material related party transactions, or in instances where evidence of related parties existed, did not perform sufficient procedures regarding material related party transactions.”

In 15 of the 23 audits, the firms “did not perform sufficient procedures to test the occurrence, accuracy, and completeness of revenue.”

Procedures in the aftermath of the PCAOB Interim Inspection Report

As attorneys we represent public and private companies and their directors and officers in regard to compliance with SEC practice and regulation. The PCAOB report should be a wakeup call for all in the industry. There must be every effort to insure auditor independence. Auditors will need to demonstrate they perform sufficient procedures so that the SEC does not impose additional procedures to insure the audits are effective and independent.

Posted in Securities Fraud

Topics:  Audits, Broker-Dealer, PCAOB, SEC

Published In: Business Organization Updates, Business Torts Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© The Law Offices of Tacopina Seigel and Turano, P.C. | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »