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PCAOB Issues Guidance to Auditors of Broker-Dealers

Posted in Broker-Dealer Regulation, PCAOB

On June 24, 2014, the Public Company Accounting Oversight Board (PCAOB) released staff guidance to help auditors of brokers and dealers registered with the Securities and Exchange Commission (SEC) plan and perform audits in accordance with PCAOB standards as mandated by the Dodd-Frank Act and SEC rules.

In July 2013, the SEC adopted amendments to Rule 17a-5 under the Securities Exchange Act of 1934 annual reporting rules for brokers and dealers.  The amendments, among other things, require audits of brokers and dealers to be performed in accordance with the standards of the PCAOB for fiscal years ending on or after June 1, 2014.  Prior to the effective date of the amendments, those audits were performed under generally accepted auditing standards.

This staff guidance was developed primarily to assist auditors of smaller brokers and dealers that have less complex operations in adhering to PCAOB standards. Because some auditors of smaller, less complex brokers and dealers will be applying PCAOB standards for the first time, the publication includes a “Getting Started” chapter, which introduces these auditors to certain PCAOB standards and rules. “To enhance investor protection, broker-dealer auditors must now meet PCAOB requirements,” said PCAOB Chairman James R. Doty. “This guidance is tailored to help auditors of smaller broker-dealers develop a cost-effective, scaled approach to their audits.

Under SEC rules, broker-dealers are required to maintain minimum levels of net capital and take steps to safeguard customer securities and cash.  These financial responsibility rules help serve the SEC’s overriding function of protecting investors.  The roles of the auditors, under the PCAOB standards, will enhance the quality of information provided to the SEC and in turn improve regulatory oversight of broker-dealers who serve the investing public.

The staff guidance highlights relevant requirements for SEC-required broker and dealer audits and attestation engagements and provides staff guidance on the application of PCAOB standards to these engagements. The publication is intended to help auditors plan and perform audits of brokers and dealers in accordance with PCAOB standards. Additionally, this publication highlights some of the significant provisions of SEC Rule 17a-5 and PCAOB standards and rules applicable to audits of brokers and dealers.

There were 783 registered auditors that issued audit reports on 2012 year-end financial statements of broker-dealers that were filed with the SEC, as of May 2013.  Given the number of auditors with broker-dealer clients, the guidance will affect a substantial number of auditing firms.