March 02, 2015 Practice Points

PCAOB Provides Observations in Broker-Dealer Audits Subject to New Standards

A reminder for accounting professionals performing audit and attestation engagements of broker-dealers to familiarize themselves with the applicable PCAOB standards.

By James Thomas and Laura D'Allaird

On January 28, 2015, the Public Company Accounting Oversight Board (PCAOB) issued a release providing observations from its interim inspections of five audit and attestation engagements of registered public accounting firms for brokers and dealers. The selected 2014 engagements were required to be conducted for the first time in accordance with PCAOB standards. The PCAOB expressed concern that it found deficiencies in all five of the audits and four of the five attestation engagements included in its initial inspections, observing auditors may not be sufficiently familiar with recent amendments to SEC Rule 17a-5 and the PCAOB standards applicable to their audit and attestation engagements of brokers and dealers. The PCAOB issued the release to provide insight from these initial inspections for auditors. To this end, the PCAOB also recommended that firms auditing broker-dealers review the Staff Guidance for Auditors of SEC-Registered Brokers and Dealers issued by the PCAOB on June 26, 2014.

The Dodd-Frank Act amended the Sarbanes-Oxley Act to, among other things, authorize the PCAOB to oversee the audits of broker-dealers registered with the Securities and Exchange Commission (SEC). The SEC in turn amended Exchange Act Rule 17a-5 to require that audits of broker-dealers be conducted in accordance with PCAOB standards. The requirement to follow PCAOB standards, which differ in some respects from prior applicable standards, became effective for broker-dealer annual reports with fiscal years ending on or after June 1, 2014.

Process and Findings 
The PCAOB stated that it focused its inspections on (1) areas relevant to the amended Rule 17a-5, (2) topics that are unique to audits and other engagements for broker-dealers subject to PCAOB standards, including, for example, Auditing Standard No. 7 (Engagement Quality Review), Attestation Standard No. 1 (Examination Engagements Regarding Compliance Reports of Brokers and Dealers), and Attestation Standard No. 2 (Review Engagements Regarding Exemption Reports of Brokers and Dealers), and (3) deficiencies that the PCAOB had noted in past inspections of audits of broker-dealers.

The deficiencies identified by these most recent inspections included audit procedures relating to supplemental information that accompanies broker-dealer financial statements. Specifically, the PCAOB noted that auditors did not sufficiently evaluate whether the broker-dealers’ computations of net capital and customer reserves, including both form and content, complied with the Customer Protection and Exchange Act Rules 15c3-1 and 15c3-3. The PCAOB also provided observations regarding procedures related to financial-statement audits covering revenue recognition, risk of material misstatement due to fraud, financial statement presentation and disclosures, related party transactions, reliance on records and reports, and fair value estimates. The PCAOB also identified deficiencies with audit documentation, engagement-quality review, and auditor reports. With respect to attestation engagements, the board noted deficiencies in engagement procedures, such as failing to perform tests of controls, as well as deficiencies in review reports, such as an auditor-review report that covered a period of time beyond that which the broker-dealer’s statements covered in its exemption report.


For 2015, the PCAOB plans to inspect about 75 firms and portions of approximately 115 audit and attestation engagements required to be conducted pursuant to PCAOB standards. According to the board’s release, it will issue future reports describing significant observations from those inspections. Given the PCAOB’s authority to oversee broker-dealer audits, the board’s release is a useful reminder for accounting professionals performing audit and attestation engagements of broker-dealers to adequately familiarize themselves with the applicable PCAOB standards.

Keywords: litigation, professional services liability, PCAOB, broker-dealer

— James W. Thomas Jr. and Laura D'Allaird, Arnold & Porter LLP, Washington, D.C.

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