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U.S. Brokerage Audits Found Lacking, Failing to Protect Investors' Funds

Government Watchdog Says U.S. Brokerage Audits Overrun with Deficiencies

All of the U.S. brokerage auditor firms included in a sample review conducted by the Public Company Accounting Oversight Board (PCAOB) failed to meet expected levels of performance, according to an Aug. 20 press release. A number of the 10 firms studied also failed to take the steps necessary to ensure the safety of investors’ funds.

“The failure rates here are mind-boggling,” former SEC chief accountant Lynn Turner told a Bloomberg reporter, adding that the errors could warrant enforcement actions. “This level of failure rate can only lead market participants to conclude that you cannot rely upon these audits. How after everything blows up on Madoff could you [the auditors] have still screwed up so bad?”

The report is the first public report issued as a result of PCAOB’s interim inspection program. Instituted last year, the program is designed to provide additional oversight of the approximately 800 auditors who oversee the roughly 4,400 SEC-registered brokers and dealers that file financial statements each year.

The report notes a large number of brokerage audit performance deficiencies, including the following:

• In seven out of 23 audits, PCAOB inspectors found that the auditors failed to sufficiently test components of the broker or dealer’s minimum net capital computation. (The computation is supposed to ensure that the firm’s have sufficient liquidity.)

• In two out of nine audits, PCAOB inspectors found that the auditors failed to verify that brokers and dealers who were required to maintain a customer reserve actually designated that the accounts were for the exclusive benefit of their customers.


• In two audits, PCAOB inspectors found that the auditors “failed to maintain independence” by preparing, or assisting in the preparation of, the financial statements that were being audited.

• In six out of nine audits, PCAOB inspectors found that the auditors failed to perform sufficient procedures to test the validity of the securities valuations submitted by the brokers and dealers.

• In 15 out of 23 audits, PCAOB inspectors found that the auditors failed to adequately test the occurrence, accuracy, and completeness of revenue reported by brokers and dealers.

The inspections were conducted over a five-month period from October 2011 to February 2012, and the PCAOB has already scheduled additional inspections. This year, the PCAOB anticipates inspecting over 40 firms and examining portions of approximately 60 audits. Additional progress reports will be issued. For more information, visit the PCAOB’s website.

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