|DATE:||Aug. 19, 2013|
|SPEAKER:||Robert Maday, Deputy Director, Division of Registration and Inspections|
|EVENT:||Statement Regarding the Second Report on the Progress of the Interim Inspection Program Related to Audits of Brokers and Dealers|
Thank you, Jay, and thank you to the members of the press for joining us today.
The views I express today are my personal views and do not necessarily reflect the views of the Board, any Board member, or the staff of the PCAOB.
In this second report on our interim inspection program, we are providing the independence findings and audit deficiencies from our inspection of 43 firms and portions of 60 audits. It is important that we specifically say "portions," because we do not inspect every area in the audit selected.
These inspections are additive to the inspections included in the first report and are a component of our initial plan for the inspection of approximately 100 firms and approximately 170 audits through 2013.
Our plan for 2014 and beyond is being developed with knowledge gained from these inspections and the new knowledge of the changes to Exchange Act Rules and their effective dates as announced by the Securities and Exchange Commission at the end of last month.
We have two major objectives for this interim inspection program: 1) assess compliance of audit work for audits of brokers and dealers with the applicable audit standards and rules, and 2) gather information to inform the Board about the eventual determination of the scope and elements of a permanent inspection program. We have been working towards these objectives and making good progress.
In addition, our interim inspection program provides the auditors with an opportunity to get an assessment of their audit work. All firms, whether inspected or not, have the opportunity to improve the quality of their audits though our reporting of the audit deficiencies.
The audit deficiencies are grouped into the same categories as the previous report: 1) compliance with rules of the SEC, such as Rules 15c3-1 and 15c3-3, and 2) financial statement audit procedures.
The first category deals with audit procedures surrounding material inadequacies, customer protection, and net capital requirements. Part of the rules require the auditor to obtain reasonable assurance that any material inadequacies in the accounting system, internal accounting controls, and procedures for safeguarding securities would be disclosed in the accountant's supplemental report.
In 41 of the 60 audits, we found that auditors failed to perform sufficient procedures to provide reasonable assurance that any such material inadequacies would have been found and disclosed. For 33 of the 47 broker-dealer audits inspected, Inspections staff found that firms did not perform sufficient procedures to determine whether the broker or dealer complied with the conditions of the exemption claimed.
Regarding audit procedures related to the customer protection rule, we identified deficiencies in five of the 13 audits where the broker-dealer did not claim an exemption from Rule 15c3-3. Regarding audit procedures related to the net capital rule, Inspections staff identified deficiencies in 23 of 60 where firms did not perform sufficient tests of the components of the computation of net capital.
The second category of findings dealt with the audits of the financial statements of brokers and dealers. Those findings were in the areas of the auditors' consideration of, and response to, the risks of fraud, auditing related party transactions, auditing revenue recognition, establishing a basis for reliance on records and reports, auditing fair value measurements, evaluating control deficiencies, and testing the accuracy and completeness of financial statement disclosures.
We observed that firms did not perform certain procedures or did not perform sufficient procedures. Some of these deficiencies are relatively fundamental concepts of auditing.
The Interim Inspection Program is also focused on gathering information to inform the Board about the eventual determinations of the scope and elements of a permanent inspection program.
At this time, the Board has not made any determinations with respect to the scope or elements of a permanent inspection program. We continue to gather information. We have made progress in obtaining data about brokers and dealers, which is sometimes difficult to do, as much of the information is not publicly available.
The broker-dealer industry is rather complex and, as a result, the Board is taking a careful and informed approach with the objective of protecting customers of brokers and dealers. In order to determine the scope of a permanent inspection program, the Board is working to identify ways to differentiate the risk of loss to customers and to determine whether any particular differentiation provides a basis to inform the Board's determination of the scope of a permanent inspection program.
The Board is evaluating whether the risk of loss to customers can be assessed from various attributes that characterize brokers and dealers and thus, provide for differentiation of classes of brokers and dealers. The factors that are being considered will be evaluated on an individual as well as aggregate basis. For informational purposes, the report includes six of these factors.
In summary, our second report covers independence findings and audit deficiencies that are troubling. Firms should take appropriate action to prevent or correct any such audit deficiencies. Our interim inspections program continues, as we are well into our inspections for 2013. We hope firms take advantage of our inspections and take appropriate action to improve the quality of the audits they perform.