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The Future of Broker-Dealer Audits

Financial_reportingThe AICPA has a long history of advocacy on behalf of the public interest, including investors and the markets. Our advocacy regarding the regulation of the auditors of broker-dealers is a good case in point.

Under the Dodd-Frank Act, the Public Company Accounting Oversight Board was given the authority to conduct inspections of auditors of broker-dealers.  The AICPA has strongly supported inspection of auditors of broker-dealers that clear, carry and have custody of client funds, given the serious consequences for investors and markets when fraud occurs at these entities. The Institute does not believe, however, that PCAOB registration and inspection should apply to the auditors of introducing or non-carrying broker-dealers, who have no or very limited access to client funds and, as a result, do not pose the kind of risk to investors or the markets that would warrant PCAOB oversight.

The question of regulation of auditors of broker-dealers was raised again last June in light of proposed revisions to Securities and Exchange Commission Rule 17a-5, Reports to be Made by Certain Brokers and Dealers, that would affect both issuer and non-issuer broker-dealers as well as their auditors. At that time, the PCAOB created a temporary inspection program that covers auditors of all broker-dealers, both carrying and non-carrying. (The PCAOB has said it may narrow the scope of the program in its final inspection program.) The Institute believes that the AICPA peer review program already represents an effective safeguard and is more cost-beneficial for these auditors.

The proposed amendments to Rule 17a-5 would also change the guidance that broker-dealer auditors must follow, switching from generally accepted auditing standards (GAAS) to PCAOB standards. Under the SEC proposal, carrying broker-dealers would be required to file a Compliance Report that would be the basis for a compliance examination by the independent public accountant, which would result in an Examination Report issued by the independent public accountant.  A non-carrying broker-dealer claiming an exemption from Rule 15c3-3 would be required to file an Exemption Report that would be the basis of a review engagement by the independent public accountant related to the exemption. Additionally, broker-dealers would be required to file a new Form Custody on a quarterly basis. This Form would include detailed information on how the broker-dealer handles customer cash and securities and provide regulators with information about the broker-dealer’s compliance with regulatory requirements about the broker-dealer’s custodial practices, similar to the recently adopted amendments to the oversight of custody practices of registered investment advisers. These new reports and form are each significant departures from current practice, and broker-dealers and their auditors should be aware of how these and other potential changes could affect them if enacted.

It is not yet certain when these proposals are expected to be finalized and when the new rules would become effective. In the meantime, the Institute will continue its advocacy and awareness efforts. There are about 1,200 firms performing audits of broker-dealers, but only about 10% of the broker-dealers involved have access to client funds. We believe that regulators should focus on that group and not impose unneeded regulation on non-carrying broker-dealers and their auditors. 

Irina Portnoy, Technical Manager, American Institute of CPAs.


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