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.