The Public Company Accounting Oversight Board (PCAOB) has found a continued high number of audit deficiencies for brokers and dealers.
The PCAOB’s Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers found audit deficiencies at 68 of the 75 audit firms inspected, or 91% of firms. This was down from 97% in 2016. Although the number of firms that displayed deficiencies in audit was reduced, many of the deficiencies identified were ‘fundamental to conducting audits, examinations, or reviews’.
The highest frequency of audit deficiencies were found in auditing revenue, assessing and responding to risks of material misstatement due to fraud, and auditing supplemental information for the customer protection rule.
Audit firm quality control system deficiencies were identified in areas such as exercising due professional care and performing engagement quality reviews.
Only four independence violations were identified during 2017, or 8% of the audits where independence was a focus area, compared to 10% in 2016.
The independence impairments of three of the four firms were based on the audit firm having performed bookkeeping or other services related to the broker-dealer’s financial statements, supplemental information, or exemption report.
In the other audit, the firm’s independence was compromised because of an indemnification clause in the firm’s engagement letter that stated that the broker-dealer would indemnify the firm from any and all claims of the broker-dealer and third parties when there was knowing misrepresentation or concealment of information by the broker-dealer’s management, regardless of the nature of the claim.
For 2017, the selection of independence as a focus area was risk based, taking into consideration the characteristics of the audit firm, as compared to 2016 when independence was a focus area for all inspections.
The PCAOB recommended broker-dealer owners and their audit committees to discuss the results of the report with their auditors as it ‘may encourage their auditors to take appropriate actions to avoid audit and attestation deficiencies’.