The Public Company Accounting Oversight Board ("PCAOB") discovered a high number of audit deficiencies among auditors of broker-dealers based on data collected from 75 firms and 116 audits conducted during 2017. The report documented deficiencies at 91 percent of the firms tested, down from 97 percent in 2016. However, the PCAOB found fewer incidents of independence violations than in previous years.
According to the PCAOB's 2018 annual report, the areas with the highest rate of audit deficiencies were (i) auditing revenue, (ii) assessing and responding to risks of material misstatement due to fraud, and (iii) auditing supplemental information for the customer protection rule. However, the PCAOB noted, audit firms with greater experience in conducting audits in accordance with PCAOB standards typically have fewer audits with deficiencies. The decrease in independence violations, according to the PCAOB, may be a result of the successful efforts of inspectors, enforcement actions and outreach in helping auditors to comply in this particular area.
Based on its findings, the PCAOB urged the auditors of broker-dealers to reevaluate their programs and procedures to address the deficiencies identified in the report. Additionally, the PCAOB advised broker-dealer owners to discuss the PCAOB's findings with their audit committees. Given the importance of appropriate and adequate oversight, the PCAOB recommended that quality control systems be perpetually reevaluated for effectiveness.
Commentary / Joseph V. Moreno
Broker-dealers may recall that the authority of the PCAOB over broker-dealer audits derives from the Dodd-Frank Consumer Protection Act and efforts to address the Bernie Madoff scandal and other Ponzi schemes. As a result, a focus on the assessment of risks of material misstatements due to fraud will continue to be a priority for auditors and audit committees. Broker-dealers and their auditors must remain diligent and can anticipate continued scrutiny until such levels of audit deficiencies drop to more reasonable levels.
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