PCAOB Spotlight: Insights into the PCAOB’s Inspection of Audits of Broker-Dealers

By Vic Peña, CPA, CGMA, Partner; Harley Aronoff, CPA, Partner; and Rachel DiDio, CPA, Partner

The Public Company Accounting Oversight Board’s (PCAOB) inspection findings related to audits of SEC-Registered Broker-Dealers that are required to file audited financial statements (Registered Broker-Dealers) in accordance with the Securities Exchange Act of 1934 are communicated in the PCAOB’s Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers (Annual Report). The Annual Reports have consistently noted high deficiency rates in the audit and attestation engagements reviewed. In its most recent Annual Report, the PCAOB stated that the overall “… deficiency rates observed in 2022 inspections of broker-dealer engagements generally increased or remained elevated across engagement types and areas.”

On January 30, 2024, the PCAOB published a Spotlight, intended to be read alongside the Annual Report, providing further insights into the PCAOB’s inspection of audits of Registered Broker-Dealers, including potential contributing factors to the high deficiency rates and related reminders for auditors. These deficiencies, observed across various audit and attestation engagements, raise serious concerns about the quality and reliability of the audit and attestation engagements of Registered Broker-Dealers.

This Spotlight focused on the following insights into the PCAOB’s inspection results related to audits of registered broker-dealers which we have summarized here for our readers.

Insufficient Understanding of the Broker-Dealer Industry

A fundamental issue identified is the auditor’s insufficient understanding of the unique aspects of the broker-dealer industry. This lack of knowledge hampers the ability to conduct effective audits and attestation engagements, leading to significant deficiencies. For instance, auditors struggle with the intricacies of the Net Capital Rule and other relevant Financial Responsibility Rules – critical to Registered Broker-Dealer operations and customer protection.

Lack of Professional Skepticism

The Spotlight highlights a concerning lack of professional skepticism among auditors. This attitude undermines the efficacy of audits and attestation engagements of Registered Broker-Dealers, as auditors may too readily accept management’s assertions without adequate verification. This deficiency is particularly alarming given the potential for fraud and misstatement in financial reports that could negatively impact a Registered Broker-Dealer’s customers.

Lack of Rigor in Risk Assessment and Consideration of Internal Controls

The Spotlight underscores a widespread lack of rigor in risk assessments and consideration of internal controls. Auditors often fail to identify and respond appropriately to the risks inherent in broker-dealer operations. This oversight is a significant concern, considering the complex and high-risk nature of the industry.

Inexperience with PCAOB Standards

Many audit and attestation engagements of Registered Broker-Dealers are performed by firms that do not audit any public companies and audit 50 or less Registered Broker-Dealers. The Spotlight highlights that of approximately 3,400 SEC-Registered Broker-Dealers, over 1,000 were audited by such firms. Accordingly, many auditors demonstrate inexperience with PCAOB standards, contributing to high deficiency rates.

Ineffective Engagement Quality Review

Corresponding to the previously-mentioned issue, numerous PCAOB-registered audit firms lack partners or their equivalents possessing the requisite knowledge and industry experience required to perform an engagement quality review pursuant to PCAOB standards. As such, the engagement quality review process is often ineffective, with reviewers failing to critically assess the engagement team’s significant judgments and responses to identified risks.

Overreliance on Standardized Audit Programs

While the use of standardized audit programs can enhance efficiencies, these audit programs are often not designed to be all-encompassing, leading to the omission of necessary procedures. It’s crucial for the auditor to tailor any standardized audit programs used to address the specific risks associated with the broker-dealer being audited.

Low-Cost Providers and the Pace of Auditor Change

As stated in Spotlight, “Smaller audit firms are called upon by smaller, cost-conscious broker-dealers, since engagement fees are often lower than those proposed by larger audit firms.” This significantly contributes to the deficiencies discussed throughout Spotlight. When choosing a PCAOB-registered audit firm, cost should not be the driving force for a broker-dealer. Audit quality should be of utmost importance to both the audit firm and the broker-dealer.

Spotlight on Quality

The deficiencies in audit and attestation engagements of Registered Broker-Dealers have far-reaching implications that compromise the regulators’ oversight and efforts to enhance customer protection. The Spotlight serves as a critical wake-up call for auditors and the broker-dealer industry. It highlights the need for a more robust, knowledgeable and skeptical approach to auditing in this complex industry.

Contact Us

The time for selecting a PCAOB-registered audit firm merely based on low costs is long gone. There is too much at stake for the Registered Broker-Dealer. Ensuring you choose a PCAOB-registered audit firm with the necessary resources, skills and industry experience is paramount. If you would like to discuss how our specialists can assist you with your audit, contact your client service team at PKF O’Connor Davies or:

Vic Peña, CPA, CGMA
Broker-Dealer Practice Leader | 646.449.6380

Harley Aronoff, CPA
PCAOB Quality Assurance Leader | 212.986.4650

Rachel DiDio, CPA
Broker-Dealer Specialist | 646.965.7780