PCAOB Releases Interim Inspection Report on Audits of Brokers and Dealers

For a full update on the latest PCAOB Hot Button Issues and developments, please attend our quarterly recap webinar.  Our next webinar is scheduled for September 14 at 1:00 PM Eastern, and will focus on Root Cause Analysis

On August 18, the PCAOB released their Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers.

The report covers inspections of 75 firms related to 115 audits and 114 attestation engagements.

Probably the most encouraging sign was that the number of Independence Findings went down from 25% of firms in 2014 to 8% in 2015.  This is not that surprising in light of the emphasis that the SEC has placed on auditor independence.   As Brian T. Croteau noted in his remarks before the 2015 AICPA National Conference on Current SEC and PCAOB Developments

Investor confidence in financial reporting is highly dependent on auditors’ commitment to maintaining independence in both fact and appearance.  Auditor independence lies at the very foundation of the profession and is necessary to reduce threats to auditors’ objectivity and lend credibility to the fair presentation of the financial statements

On the downside –

  • 89 of the 115 audits inspected (77%) had deficiencies
  • 70% of the inspections revealed at least one deficiency related to revenue.  As revenue standards continue to change, this is likely to be an ongoing concern.
  • It is also of concern that 42% of inspections revealed a risk of material mistatement due to fraud,
2015 2014
Audit and Other Deficiencies Number of Audits with Deficiencies Number of Applicable Audits Percentage of Audits with Deficiencies Percentage of Audits with Deficiencies
Audit Deficiencies Related to the Financial Statements
Revenue 80 115 70% 72%
Financial Statement Presentation and Disclosures 43 115 37% 44%
Related Party Transactions 27 85 32% 21%
Risks of Material Misstatement Due to Fraud 24 57 42% 42%
Fair Value Measurements 19 43 44% 44%
Receivables and Payables 14 67 21% 19%
Audit Deficiencies Related to the Supporting Schedules
Net Capital Rule 34 115 30% 39%
Customer Protection Rule 16 30 53% 43%
Other Deficiencies Related to the Audit
Reporting on the Financial Statements and Supporting Schedules 9 115 8% 8%
Audit Documentation 30 115 26% N/A
Engagement Quality Review 66 115 57% N/A
Deficiencies in Audit Committee Communications
Independence Communications to the Audit Committee (or equivalent) 12 115 10% N/A

We encourage you to read the entire report, especially of you are in the broker/dealer industry.  But even if you are not, this report could give you some insight into the types of issues that the PCAOB is looking into.