Welcome to the third PCAOB Forum on Auditing
Smaller Broker-Dealers. I am Jeanette Franzel, one of the five Board
members of the Public Company Accounting Oversight Board. I will be
the host and moderator of today's forum.
PCAOB Auditing Forums
Since 2004, the PCAOB has been holding forums for the small
business auditing community in cities across the United States, and
last year, PCAOB inaugurated this series of forums on Auditing
Smaller Broker Dealers. The goal of those forums is to open an
avenue for discussion and dialogue with auditors of public companies
Our broker-dealer forums were initiated last year in light of the
Board's new inspection and standard-setting authority over auditors
of SEC-registered securities broker-dealers. The Dodd-Frank Act,
passed in the summer of 2010, gave the Board this authority as
Congress decided to strengthen the oversight of securities industry
auditors after the stunning revelation of the Ponzi scheme operated
out of Bernard L. Madoff Investment Securities.
Many auditors of broker-dealers had not previously been subject
to the Board's jurisdiction. In fact, the SEC's pre-Dodd Frank
decision to require broker-dealer auditor registration with PCAOB
brought over 500 additional firms onto our registration rolls. As of
April 10, there were 516 firms registered with the PCAOB that audit
broker-dealers but do not audit issuers or play a substantial role
in auditing issuers.
We are still building our base of knowledge concerning the unique
features and challenges of broker-dealer auditing. Similarly, many
audit firms with a broker-dealer practice are learning about the
These forums are designed to provide information to and seek the
views of auditors of brokers and dealers. Last year, PCAOB's Forums
on Auditing Smaller Broker-Dealers in Jersey City, NJ, and
Huntington Beach, CA had 321 attendees. Today, we are expecting more
than 100 attendees. This is the PCAOB's first
Broker-Dealer Auditing Forum in 2012, with three additional forums
planned during 2012 in Houston; Jersey City; and San Diego.
PCAOB Broker-Dealer Auditor Oversight Program
As you will hear, we are still designing our broker-dealer
auditor oversight program. The Board's approach to this new
responsibility is focused around (1) investor protection and (2) a
measured approach to the diversity of the broker-dealer population
while weighing risks, costs, and benefits.
The Board was created to "protect the interests of investors and
further the public interest in the preparation of informative,
accurate, and independent audit reports" for public companies — and
now also for broker-dealers. The implementation of our new
authorities will be based on what is in the best interests of
Second, the Board recognizes that its broker-dealer auditor
oversight program must reflect the diversity of the broker-dealer
population and the wide differences in risk profiles. The Board
recognizes that there is wide diversity in size of firms (based on
net capital held), as well as activities. While some registered
brokerage firms maintain custody of their client's securities and
cash, many do not, at least in theory, have access to customer funds
or securities. This diversity raises questions about whether and
how, on a long-term basis, we should devote resources to inspecting
the auditors of these various categories of brokers and dealers.
Congress has made the decision that investor protection requires
that broker-dealer auditors be under Board oversight. But, the Board
has considerable latitude to decide on matters like frequency of
inspection and exemptions and exclusions. The Board is using its
interim inspection program to learn more about the population of
broker-dealers and their activities before developing a permanent
The Board may ultimately conclude that the auditors of some
significant categories of broker-dealers can safely be exempted from
PCAOB oversight without compromising investor protection. But, those
decisions, when they are made, will be based on empirical
information that we gather during our interim inspection programs,
our forums, and other research and outreach.
Interim Inspection Program
On June 14, 2011, the Board adopted a temporary rule that
provides for an interim inspection program for firms that perform
audits of the financial statements of brokers and dealers.
The interim inspection program allows the Board to assess
registered public accounting firms' compliance with current laws,
rules, and standards in performing audits of the financial
statements of brokers and dealers. As part of this program, the
Board is gathering information to help guide its decisions about the
scope and elements of a permanent inspection program, including
whether to differentiate between classes of brokers and dealers;
whether different inspection schedules would be appropriate with
respect to firms that only audit certain types of brokers and
dealers; and whether to exempt any public accounting firms from
inspections related to their audits of broker and dealers.
The SEC approved the temporary rule on August 18, 2011. By the
end of 2011, the PCAOB had inspected eight firms and examined
portions of 19 audits of brokers and dealers. During 2012, the Board
anticipates inspecting over 40 firms and portions of approximately
The PCAOB does not expect to issue firm-specific inspection
reports as part of the interim inspection program. Instead, to keep
the public informed, the Board will publish annual reports
describing the progress of the interim program. The first such
annual progress report is expected to be issued in August 2012. The
Board anticipates proposing rules governing the scope and elements
of a permanent program in 2013.
After gaining valuable insight through the interim inspection
program and analysis of broker-dealer characteristics, the Board
will then consider whether there should be exemptions from the
permanent program, including for auditors of brokers that do not
receive or hold customer funds.
In addition to inspections, the other pillar of the broker-dealer
auditor oversight program will be new auditing standards.
On July 12, 2011, the Board issued for public comment proposed
audit and attest standards for audits of broker-dealer and issuer
engagements.  The proposals consist of two
attestation standards related to the auditor's examination of
compliance reports and review of exemption reports of broker-dealers
proposed by the SEC as part of its amendments to the
broker-dealer financial reporting rule under Securities Exchange Act
of 1934 ("Exchange Act") Rule 17a-5. The proposals also include a
new standard on auditing supplemental information accompanying
audited financial statements that broker-dealers and issuers file
with the SEC.
Unlike public company auditing, the protection that investors
derive from the auditor's broker-dealer work results primarily from
the auditor's association with compliance-related information
outside the financial statements. The examination and review
engagements that are the basis for auditor reporting on these
matters provide the Commission, FINRA, and investors with
independent assurance that customer assets are not exposed to
misappropriation or similar risks.
The Board's proposed standards dovetail with the Commission's
proposed amendments to Securities Exchange Act Rule 17a-5 and are
designed to provide the level of assurance the SEC requires, but
without generating unnecessary expense or complexity, especially for
smaller firms. The proposed standards are also intended to recognize
the diversity of the broker-dealer population. They are explicitly
risk-based and structured to be scalable to brokerage firms of
different types and sizes. The standards also emphasize that the
financial statement audit and the work related to financial
responsibility compliance should be coordinated to avoid needless
duplication of effort.
Whether or not the Board's proposed standards become applicable
to the audits of broker-dealers is dependent of the timing and
substance of the adoption by the SEC to its proposed amendments to
Rule 17a-5. In the meantime, broker-dealer audits are subject to the
existing SEC rules, including the requirement to follow generally
accepted auditing standards (GAAS) issued by the AICPA.
Today we have a rich agenda, including information about the
current economic trends in the Broker-Dealer landscape, current and
future rules and standards applicable to Broker-Dealers and their
auditors, and IT risks facing broker dealers. In addition, you will
have the opportunity to ask questions and interact directly with
representatives from the SEC, FINRA, and the PCAOB.
I hope you will find the day worthwhile and informative. We look
forward to your comments and active participation.
Thanks for attending our forum and thank you for your attention.