Fact Sheet: Annual Report on the Progress of the
Interim Inspection Program Related to Audits of Brokers and Dealers (August 18, 2015)
Why the Board is Issuing this Report
The Public Company Accounting Oversight Board released its annual report on
the progress of the interim inspection program for auditors of brokers and
dealers registered with the Securities and Exchange Commission.
The interim program began in the fall of 2011 in response to the Board's new
oversight authority provided in the Dodd-Frank Wall Street Reform and Consumer
Protection Act. The Board has issued annual progress reports on the interim
program beginning in August 2012.
The Interim Inspection Program
- Enables the Board to assess the compliance of registered firms and their
associated persons conducting audits of broker-dealers with the Sarbanes-Oxley
Act, Board and SEC rules, and professional standards.
- Informs the Board's eventual
determinations about the scope and elements of a permanent inspection
Inspections of Registered Public Accounting Firms During 2014
- Encompassed audits selected for inspection during 2014 that had financial
statement periods ended on or before May 31, 2014.
- Inspected 66 audit firms reviewing
portions of 106 audits of SEC-registered broker-dealers, which were required
to be performed under GAAS.
audit deficiencies at each of the firms inspected and in 92 of the 106 audits
selected for inspection.
independence findings in 26 of the 106 audits inspected.
the 66 audit firms inspected:
firms were already subject to PCAOB inspection because they audited public
firms were not subject to inspection other than under the interim inspection
Audit deficiencies were noted at all 66 firms inspected and in portions
of 92 of the 106 audits selected for inspection (or approximately 87
The most frequent audit deficiencies were observed in the following
- Revenue recognition
- Reliance on records and
value accounting estimates
statement presentation and disclosures
procedures related to the customer protection rule
Additionally, seven audits by seven firms were selected to evaluate
whether or how certain audit deficiencies identified during a previous
inspection had been addressed in the current audit. In all seven audits, at
least one audit deficiency in the same area as previously identified was noted
by Inspections staff.
Inspections staff found that, contrary to the requirements of SEC
independence rules, some auditors were involved in the preparation of financial
statements that they audited, and some auditors included in the terms of the
engagement letter language that would indemnify the auditor in the event of
Independence findings were identified in approximately 25 percent (26 of 106)
of the audits selected for inspection. These findings included:
- Involvement in the preparation of the financial statements in
approximately 43 percent (18 of 42) of the audits selected for inspection that
were performed by 39 firms that audited broker-dealers but did not audit
- Involvement in the preparation of the
financial statements in approximately 6 percent (four of 64) of the
audits selected for inspection that were performed by 27 firms that audited
broker-dealers and also audited issuers.
letters for four audits selected for inspection included clauses
that would indemnify the auditor in the event the auditor incurred
certain losses or liability in connection with the engagement.
Summary of Inspections of Registered Public Accounting Firms Since Inception
of the Interim Inspection Program
Since inception of the interim inspection program through the end of 2014,
the Board has inspected 155 registered public accounting firms covering portions
of 279 audits that were required to be performed under GAAS. Thirteen of these
firms were inspected more than once.
- Audit deficiencies or independence findings (collectively "observations")
were identified in 243 of the 279 portions of audits selected for inspection
(approximately 87 percent).
- The 36 audits where no observations
were identified were performed by 15 firms, 12 of which also audited
percentage of observations in the audits and areas inspected in 2014 continued
to remain high and was higher in comparison to the inspections performed
percentages of observations were identified across firm and broker-dealer
Observations by Firm Characteristics
- Firms that did not also audit issuers were noted to have a higher
percentage of audits with observations than the firms that also audited
- Firms that audited 100 or fewer
broker-dealers had a higher percentage of audits with observations than firms
that audited more than 100 broker-dealers.
Observations by Broker-Dealer Characteristics
- Generally, there did not appear to be a discernible relationship between
the percentage of audits with observations and broker-dealer characteristics
with two exceptions:
- Lower percentages of observations
were noted for the selected audits of broker-dealers with the highest
amounts of reported actual net capital, revenues, or assets; and
percentages of observations were noted for audits of broker-dealers that did
not claim an exemption under Rule 15c3-3 than for audits of broker-dealers
that claimed an exemption under Rule 15c3-3.
Next Steps of the Interim Inspection Program
- During 2015, the Board plans to inspect approximately 75 firms and
portions of approximately 115 audits.
- During 2015, the Board
will inspect audits of broker-dealers, which are required to be performed
in accordance with PCAOB standards, to assess compliance with PCAOB standards,
rules of the SEC and the Board, and the Sarbanes-Oxley Act of
Scope of a Permanent Inspection Program
- PCAOB staff is working to develop a rule proposal for the Board to
consider during 2016 to establish a permanent inspection program.
- The Board is continuing to take a
careful and informed approach in establishing a permanent inspection
Board continues to consider the risk of loss to customers and the high
percentage of audit deficiencies and independence findings that have been
observed during the inspections under the interim inspection
- The Board will continue to conduct forums for auditors of broker-dealers
that provide information about the Board, the interim inspection program,
observations from the interim inspection program, and audits of
- The Board will participate in various
outreach initiatives, including conferences and other events to inform
registered public accounting firms that issue audit reports for broker-dealers
about observations from the interim inspection program, developments in the
Board's standard-setting initiatives, and updates from the SEC and Financial
Industry Regulatory Authority.
Board will issue guidance for audits of broker-dealers, if needed, and will
continue using communication tools such as webcasts and presentations to
effectively deliver guidance and information to auditors of