The Board adopted attestation standards pertaining to audits of brokers
and dealers, an auditing standard for supplemental information
accompanying financial statements audited according to PCAOB standards,
and related amendments to other PCAOB standards.
These standards are intended to enhance the quality of broker-dealer
compliance information provided to the SEC and used in its regulatory
oversight, which is important for the protection of customers who entrust
their cash and securities to broker-dealers.
The Dodd-Frank Wall Street Reform and Consumer Protection Act amended
the Sarbanes-Oxley Act to, among other things, authorize the PCAOB to
oversee audits of broker-dealers registered with the U. S. Securities and
Exchange Commission (SEC). Specifically, the Dodd-Frank amendments
provided the Board with authority to carry out oversight responsibilities
for audits of broker-dealers, including inspections, standard setting,
investigations and disciplinary proceedings.
On July 30, 2013, the SEC amended its Rule 17a-5 to enhance safeguards
for customer assets held by broker-dealers. The amendments include a
requirement that broker-dealers file annual financial reports with the SEC
that are audited in accordance with PCAOB standards. Additionally, the SEC
adopted requirements for new compliance and exemption reports that are
covered by an auditor's report prepared in accordance with PCAOB
The PCAOB adopted two attestation standards that cover the auditor's
examination regarding compliance reports and the auditor's review
regarding exemption reports of broker-dealers. The Board also adopted a
new standard for auditing supplemental information that accompanies the
Subject to SEC approval, the standards will become effective for audits
of financial statements for fiscal years ending on or after June 1, 2014,
to coincide with the effective date for the broker-dealer reporting
requirements recently issued in the SEC Rule 17a-5 amendments.
The Examination Standard: Attestation
Standard No. 1, Examination Engagements Regarding Compliance Reports of
Brokers and Dealers, establishes requirements for the auditor's
examination of certain statements in broker-dealer compliance reports.
Consistent with SEC Rule 17a-5, the examination standard requires
auditors to obtain sufficient appropriate evidence to opine on a
broker-dealer's statements in its compliance report as to whether:
- The broker-dealer's Internal Control over Compliance was effective
during the most recent fiscal year;
- The broker-dealer's Internal Control over Compliance was effective
as of the end of the most recent fiscal year;
- The broker-dealer was in compliance with the net capital rule and
the reserve requirements rule as of the end of the most recent fiscal
- The information the broker-dealer used to state whether it was in
compliance with the net capital rule and reserve requirements rule was
derived from its books and records.
Additionally, the examination standard provides requirements for
- Focus the auditor on the matters that are most important to the
auditor's conclusions regarding the statements of the broker-dealer;
- Incorporate consideration of fraud risk, including the risk of
misappropriation of customer assets;
- Are designed to be scalable, based on the size and complexity of the
- Coordinate the examination engagement with the audit of the
financial statements and the audit procedures performed on supplemental
- Describe how to report on an examination engagement, in connection
with the requirements of SEC Rule 17a-5.
Review Standard: Attestation Standard No.
2, Review Engagements Regarding Exemption Reports of Brokers and Dealers,
establishes requirements for the auditor's review of the statements
in broker-dealer exemption reports.
Consistent with SEC Rule 17a-5, the review standard requires auditors
to obtain moderate assurance about the following statements in the
broker-dealer's exemption report:
- A statement that identifies the "exemption provisions" under which
the broker-dealer claimed an exemption;
- A statement that the broker-dealer (1) met the identified exemption
provisions throughout the most recent fiscal year without exception; or
(2) met the identified exemption provisions throughout the most recent
fiscal year, except as described in the exemption report; and
- If applicable, a statement that identifies each exception during the
most recent fiscal year in meeting the identified exemption provisions
and that briefly describes the nature of each exception and the
approximate date(s) on which the exceptions existed.
AS No. 17: Supplemental Information
Auditing Standard No. 17, Auditing Supplemental Information
Accompanying Audited Financial Statements, establishes the auditor's
responsibilities when performing audit procedures and reporting on
supplemental information that accompanies the audited financial statements
of broker-dealers and others, such as certain employee benefit plans that
must file with the SEC audited financial statements and schedules prepared
in accordance with certain financial reporting requirements of the
Employee Retirement Income Security Act of 1974.
Supplemental information is often required by regulators for
oversight purposes. AS No. 17 is intended to give the SEC and other users
greater confidence in the quality and consistency of supplemental
information accompanying audited financial statements of broker-dealers
and others. In addition to supplemental information provided by
broker-dealers, the standard may be used for other types of supplemental
information specified by the standard.
The standard includes auditor performance requirements to:
- Determine that the supplemental information reconciles to the
underlying accounting and other records or to the financial statements,
- Test the completeness and accuracy of the supplemental information,
to the extent that it was not tested as part of the audit of the
financial statements; and
- Evaluate whether the supplemental information, including its form
and content, complies with relevant regulatory requirements or other
applicable criteria, if any.
When accompanying audited financial statements, the term "supplemental
information" refers to:
- Supporting schedules broker-dealers are required to file pursuant to
SEC Rule 17a-5;
- Supplemental information (i) required to be presented pursuant to
the rules and regulations of a regulatory authority; and (ii) covered by
an auditor's report on that information related to financial statements
that are audited in accordance with PCAOB standards; or
- Information that is (i) ancillary to the audited financial
statements; (ii) derived from the company's accounting books and
records; and (iii) covered by an auditor's report on that information
related to financial statements audited in accordance with PCAOB
- Under the recent amendments to SEC Exchange Act Rule 17a-5, a
broker-dealer must prepare and file with the SEC an annual report,
consisting of a financial report and either a compliance report or an
exemption report that is prepared by the broker-dealer, as well as
certain reports that are prepared by a PCAOB-registered auditor that
relate to the financial report, and the compliance or exemption report.
- Before the recent amendments to SEC Rule 17a-5, audits of
broker-dealers were required to be performed under generally accepted
auditing standards established by the American Institute of Certified
Public Accountants (AICPA).
- The Board initially proposed the attestation
standards and supplemental
information standard on July 12, 2011.
- The Board adopted these standards after consideration of comments
received on the proposal and as a result of amendments made to Rule
17a-5 that were adopted by the SEC on July 30, 2013.
Next Steps for Broker-Dealer Audits
- Conforming Amendments: In February 2012, the Board
proposed to update certain of its rules to conform to the Dodd-Frank
amendments to the Sarbanes-Oxley Act. In part, these proposals would
amend the Board's rules requiring that registered firms comply with the
Board's auditing standards, as well as most of the Board's ethics and
independence requirements, in conducting broker-dealer audit
engagements. The Board expects to act on these proposed amendments in
separate rulemaking in the near future.
- Broker-Dealer Audit Inspection Program: In August
2011, the Board began inspections under an interim inspection program
for registered firms that audit broker-dealers. Progress reports were
issued on observations from these inspections in August 2012 and August
2013. The Board will continue to conduct inspections of audits of
broker-dealers under the interim inspection program until rules for a
permanent inspection program take effect. The Board will continue to
gather and assess information to inform an eventual rule proposal
concerning the scope of a permanent inspection program. The Board
currently anticipates presenting a rule proposal for a permanent
inspection program in 2014 or later.