Significant Changes to Audits of Broker-Dealers are Here

The rippling effect of a law passed over three years ago continued last month with new standards passed by Public Companies Accounting Oversight Board (“PCAOB”).  There were two new attestation standards covering the broker-dealers’ compliance report and examination report approved that now await final approval by the Securities and Exchange Commission (“SEC”).  The PCAOB also approved an audit standard applicable to auditing supplemental information that is filed with the SEC.  Although the standards were initially proposed by the PCAOB in July of 2011, they were not approved by the board until October 10, 2013.

The Dodd-Frank Act authorized the PCAOB to oversee audits of broker-dealers in July 2010, but it was the amendments adopted by the SEC in July 2013 that gave the PCAOB real authority over these audits.  The SEC adopted amendments to the reporting rule (Rule 17a-5) and the broker-dealer notification rule (Rule 17a-11) on July 30, 2013 in an effort to increase investor protections.  It was these amendments that required broker-dealers to engage auditors to conduct their audits in accordance with PCAOB standards.  Audits of broker-dealers were previously governed by the American Institute of Certified Public Accounts’ (“AICPA”) generally accepted auditing standards.  The requirement for the audit to be performed by a firm registered with the PCAOB began two years ago.  These new standards will be effective for fiscal years ending on or after June 1, 2014 and coincide with the effective date of the SEC amendments to Rule 17a-5.

Some of the other noted changes in the SEC amendments to Rule 17a-5 and Rule 17a-11 include the requirement of a new quarterly report to be filed with the SEC about custody of customer securities, an annual report to be filed with the Securities Investor Protection Corporation (“SIPC”), and a requirement to file an annual compliance report or exemption report with the SEC.  The amendments also require the broker-dealer to allow the staff of the SEC or a self-regulatory organization (“SRO”), such as the Financial Industry Authority (“FINRA”), to access the workpapers of the independent auditor during an examination of the broker-dealer.