Broker-Dealer Annual Audits and Accounting Standards: SEC and PCAOB Developments


As the year closes, there are three recent broker-dealer financial and operational developments that we believe merit your attention. First, the Securities and Exchange Commission (SEC) recently issued a letter to the AICPA (American Institute of Certified Public Accountants) concerning 2010 broker-dealer annual audits. Second, the Public Company Accounting Oversight Board (PCAOB) voted last week to propose new rules that will impose a fee on certain broker-dealers to offset PCAOB examination costs and also announced the adoption of an interim program to inspect public accounting firm audits of broker-dealers.

SEC Letter to AICPA

In a letter dated November 18, 2010, the SEC’s Chief Accountant and the SEC’s Director of the Division of Trading and Markets reminded auditors that they must design their audits of broker-dealers in a manner “’sufficient to provide reasonable assurance that any material inadequacies existing as of the date of the examination …would be disclosed.’” The letter reiterates the importance of the auditors’ role in ensuring that broker-dealers comply with the SEC’s financial responsibility rules, and portends a year in which external auditors are likely to be even more cautious and rigorous in their broker-dealer exams.

The letter obligates auditors to review a broker-dealer’s practices, procedures and controls to ensure compliance with the securities possession or control requirements and the cash reserve elements of the Customer Protection Rule and tells auditors that their reviews should include those tests that the auditor considers necessary to provide reasonable assurance that any material inadequacies (and significant deficiencies or material weaknesses) existing at the examination would be disclosed.

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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.

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