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PCAOB Issues New Audit and Attest Standards for Broker-Dealers

October 2013

Financial regulators have taken another step forward in rolling out the provisions of the Dodd-Frank Act. On October 10 the Public Company Accounting Oversight Board (PCAOB) announced the adoption of two attestation standards for the regulatory reporting of broker-dealers, an auditing standard for supplemental information accompanying financial statements audited according to PCAOB standards, and related amendments to other PCAOB standards.

This comes on the heels of the SEC’s adoption of new rules for broker-dealers, and it marks a coordinated effort by regulators to help protect investors—in this case by enhancing the quality of the information provided to the SEC. “The standards adopted today. . .will strengthen procedures for auditors and improve the reliability of annual reports required by the SEC for oversight of customer assets held by broker-dealers,” PCAOB chairman James Doty said in a statement.

As you may know, the Dodd-Frank Act amended the Sarbanes-Oxley Act to, among other things, authorize the PCAOB to oversee audits of SEC-registered broker-dealers. The PCAOB has said that it expects the new standards to “promote overall audit effectiveness and avoid redundancy.”

With this in mind, let’s take a brief look at the PCAOB’s three new standards.

Attestation Standard No. 1: The Examination Standard

This standard, consistent with SEC Rule 17a-5, requires auditors to determine whether:

  • The broker-dealer’s internal control over compliance was effective both during and at the end of the most recent fiscal year
  • The broker-dealer was in compliance with the net capital and reserve requirements rules as of the end of the most recent fiscal year
  • The information the broker-dealer used to state whether it was in compliance with the net capital and reserve requirements rules was derived from its books and records

The standard also requires auditors of broker-dealers to consider fraud risk and coordinate the examination engagement with the audit of the broker-dealer’s financial statements, among other requirements.

Attestation Standard No. 2: The Review Standard

This standard, also consistent with SEC Rule 17a-5, requires auditors to perform procedures regarding several statements made in broker-dealer exemption reports, including:

  • A statement identifying the provisions the broker-dealer used to claim an exemption
  • A statement that the broker-dealer either met the identified exemption provisions throughout the most recent fiscal year without exception or did so except as described in the exemption report
  • If applicable, a statement that identifies and describes each exception during the most recent fiscal year

Auditing Standard No. 17: Supplemental Information

This standard establishes the auditor’s responsibilities regarding supplemental information that accompanies broker-dealers’ audited financial statements. Its intention is to give regulators and other financial statement users greater confidence in the quality and consistency of this information. As a result, auditors must:

  • Determine that the supplemental information reconciles to the underlying accounting and other records or to the financial statements, as applicable
  • Test the completeness and accuracy of the supplemental information, to the extent it wasn’t tested during the financial statement audit
  • Evaluate whether the information complies with relevant regulatory requirements or other applicable criteria, if any

Effective Date

Assuming these new standards are approved by the SEC, their effective date will coincide with the effective date for the corresponding SEC Rule 17a-5 changes: They’ll apply to examination engagements, review engagements, and reports on supplemental information for financial statements for fiscal years ending on or after June 1, 2014.

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