PCAOB Uncovers Problems in Audits of Dealers-Brokers

Wednesday, August 22, 2012 Print Email

PCAOB has clarified through their report that the inspections carried out by them initially on auditors of broker and dealers have helped them uncover the problems associated with the entire audits. The Public Company Accounting Oversight Board was authorized to carry out inspections of auditors of dealers-brokers after the Dodd-Frank Act 2010 was issued. Starting from 2011, PCAOB conducted inspections of group of ten audit companies and twenty three audits of securities dealers and brokers. The report that has been issued recently covers that particular group. The inspection was carried out over five months, from the month of October 2011 to February 2012. The inspectors of PCAOB found inadequacies in each of the audits that were inspected by them.

The problems that were uncovered included audit related procedures for the protection of customer as well as requirements around net capital. Jeanette Franzel, PCAOB’s board member stated that the according to the Exchange Act Rules (17a-5) there should be enough scope for auditing procedures to offer reasonable amount of assurance regarding any material inadequacies in the system of accounting, internal accounting controls as well as procedures for protecting securities should be disclosed in the supplemental report of an accountant on material deficiencies.

Franzel further pointed out that in twenty one out of the twenty three audits conducted by them, the board found that the auditors did not perform enough auditing related procedures to offer reasonable amount of assurance that such material shortages could have been detected in the system of accounting, internal accounting controls as well as process for protecting securities.

The customer safeguarding rule, Rule 15c3-3, is created to safeguard customers by requiring dealers and brokers to distribute cash and securities from the dealer’s or broker’s proprietary related business actions and activities.

Even SEC guidelines prescribe that liquidity accounting standards requires dealers and brokers to maintain some specific levels of net capital on the basis of certain business lines and activities. Frazel mentioned that in as many as seven audits (out of the 23 audits) PCAOB inspectors noticed that the organizations had failed to test the components of the dealer’s or broker’s minimum net capital calculation sufficiently.  

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