Broker-Dealer Auditing Failures

The PCAOB is the board supervising accounting services to public entities.  Its 2017 report on the quality of audits of 75 BDs is troubling.

I must add that it is not clear that any of the errors noted caused any material misstatements, and that much criticism about over-regulation continues to be leveled at the regulatory framework applied to US public companies.  However and with that overlay of caution, note:

8% of auditors even failed the initial test of their independence.  Some had performed non-audit work for the BD which they now were to audit; interestingly, one auditor was disqualified because its engagement letter indemnified the auditor from liability if management knowingly misrepresented (a seemingly logical protection but the idea is that the auditor is supposed to be able to uncover that misrepresentation).

66% of audits failed properly to report revenue.  64% did not fully assess risk of misstatement due to fraud.  32% failed fully to report related party transactions.  59% failed properly to review the quality of their performance of the audit engagement.

Facially, one might conclude that BD audits are just plain unreliable, an unsettling thought about the industry that controls the care and investment of much of my, and I suspect your, personal wealth.  The PCAOB report does not necessarily mean that material error occurred, a helpful observation.  The report does suggest that material error has some palpable chance of occurring, a less sanguine thought.  The true import of this report (it is highlighted today in the leading securities lawyer blogsite “Jim Hamilton’s World of Securities Regulation”) is just obscure.

But food for thought: auditors who audit both reporting companies and broker dealers performed better than auditors who only worked on BDs.  Seems a broader world view may be better than a deep dive into only the BD universe.

 


Comments

Broker-Dealer Auditing Failures — 1 Comment

  1. As the CFO of a FINRA member whose sole service line was M&A advice, I have experienced the “hammer looking for a fly” approach that my auditor needed to apply to satisfy PCAOB. Our audits were labor intensive and, in the end, the labor-findings equation didn’t come out in parity. Now I appreciate that my firm was probably an edge case — very small firm operating with limited purpose — and our plight has been relieved by the Capital Asset Broker rules implemented by FINRA in August 2016. But audits were a force march prior to that. As my auditor stated tongue-in-check (but not really), “FINRA’s trying to put you out of business.”

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