United States: PCAOB Update: 2015 Budget And Broker-Dealer Audits

Last Updated: February 25 2015
Article by James C. Freije and Jessica E. Morrison

On Feb. 4, 2015, Public Company Accounting Oversight Board (PCAOB) Chairman James R. Doty provided an update on the Board's 2015 budget at the Securities and Exchange Commission's (SEC's) Open Meeting in Washington, D.C. Even though the Board saw a $7.5 million decrease from last year's budget, Doty reported that this year's $250.9 million budget was more than enough to continue with its strategic plan and that the Board "continue[s] to be the essential oversight body that Congress envisioned."

Doty informed the Commission that the 2015 budget would enable the Board to plan for the inspection of 300 registered firms, including 75 inspections of firms that audit broker-dealers. Sixty of the Board's inspections will occur in 26 jurisdictions outside the United States. Doty cited China as a specific example of a jurisdiction where the Board could not currently inspect, but he did note continued dialogue with Chinese authorities to pursue such access.

Doty also stressed close coordination with the Commission's Division of Enforcement and holding auditors accountable for audit failures. In 2014, the Board made public a record 24 settled disciplinary proceedings and imposed sanctions that included censures, monetary penalties, revocations of firm registrations and bars on individuals' association with registered firms. The Board's enforcement achievements continued with international enforcement activity as well as pending investigations and proceedings involving work by foreign registered accounting firms.

Finally, Doty discussed the Board's plan to develop new performance standards in multiple areas, expanding in 2015 upon the following successes of 2014:

  • New standard to strengthen auditor performance requirements in three critical areas of the audit: related party transactions, significant unusual transactions, and a company's financial relationships and transactions with its executive officers
  • Comments on potential changes to the auditing standards on accounting estimates and fair value measurements
  • Drafting of proposed auditing standards for the Board to consider regarding the supervision of other auditors in multi-location audits and the use of specialists

Broker-Dealer Inspections

Doty also stated that the first cycle of inspections of broker-dealer audits under the Commission's new broker-dealer rule and the Board's audit standards had begun. Since the Board plans to inspect approximately 75 firms that audit broker-dealers (as well as approximately 115 audit and attestation engagements) in 2015, now is the time for auditors to pay close attention to these new standards. The Board, for its part, has provided some help along the way.

Last June, the Board provided its Staff Guidance for Auditors of SEC-Registered Brokers.   Its purpose was to assist auditors of broker-dealers registered with the Commission in planning and performing audits in line with Board standards. At the time, Doty stated, "This guidance is tailored to help auditors of smaller broker-dealers develop a cost effective, scaled approach to their audits." Now that the standards have become effective, the PCAOB has again attempted to pass along guidance to auditors by publishing its findings on five broker-dealer audit and attestation engagements conducted by five auditors in 2014. The Board published these findings to remind auditors of the new standards, many of which auditors will apply for the first time in their audits of broker-dealer clients with fiscal years ending Dec. 31, 2014.

The Board's attestation standards address auditor responsibilities for examining certain statements made in compliance reports or reviewing statements made in exemption reports under Securities Exchange Act Rule 17a-5. The Board's inspection staff found deficiencies in four of the five broker-dealer audits surrounding both the examination procedures and the review reports. Additionally, the Board found deficiencies in each of the five broker-dealer audit engagements. These deficiencies included audit procedures related to the Customer Protection and Exchange Act Rule 15c3-1 (the Net Capital Rule) as well as procedures related to financial statement audits covering revenue recognition, risk of material misstatement due to fraud, financial statement presentation and disclosures, related party transactions, reliance on records and reports, and fair value estimates. The Board's inspection staff also noted audit documentation, engagement quality review and auditor report deficiencies.

The Board will issue future reports that will describe observations from the planned inspections. Stay tuned!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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