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From Securities Regulation Daily, October 10, 2013

PCAOB adopts standards for broker-dealer audits

By Jacquelyn Lumb

The PCAOB today adopted two attestation standards to cover auditors’ examinations and reviews of broker-dealer compliance and examination reports and adopted an auditing standard for the audits of supplemental information that broker-dealers file with the SEC. The preparation by broker-dealers of compliance or exemption reports and their examination or review by PCAOB-registered auditors are new requirements that were added by the SEC when it adopted amendments to Exchange Act Rule 17a-5 on July 30, 2013. The PCAOB’s standards are subject to approval by the SEC. If approved, the effective dates coincide with the Rule 17a-5 effective dates for fiscal years ending on or after June 1, 2014.

The Dodd-Frank Act authorized the PCAOB to oversee the audits of SEC-registered broker-dealers and gave the Board authority to conduct inspections, establish standards, conduct investigations and bring disciplinary proceedings. The SEC adopted amendments to Rule 17a-5 to require that broker-dealers file annual reports that are audited in accordance with PCAOB requirements and adopted the new compliance and exemption reports that must be prepared in accordance with PCAOB standards.

Attestation Standard No. 1. Attestation Standard No. 1 establishes requirements for the auditor’s examination of certain statements in broker-dealer compliance reports. Auditors must obtain sufficient evidence to provide an opinion that the broker-dealer’s internal control over compliance was effective during the most recent fiscal year and as of the end of the most recent fiscal year, and that the broker-dealer was in compliance with the net capital rule as of the end of the most recent fiscal year.

The standard also requires auditors to consider fraud risk, including the risk of misappropriation of customer assets. It is scalable to the size and complexity of the broker dealer. The examination engagement is to be coordinated with the audit of the financial statements and the audit procedures that are performed on supplemental information.

Attestation Standard No. 2. Attestation Standard No. 2 requires auditors to obtain moderate assurance about the exemption provisions claimed by the broker-dealer. The broker-dealer must state that it met the identified exemption provisions throughout the most recent fiscal year without exception or met the exemption provisions throughout the most recent fiscal year other than as described in the exemption report.

Auditing Standard No. 17. Auditing Standard No. 17 establishes the auditor’s responsibilities when performing procedures and reporting on the supplemental information that accompanies the broker-dealer’s financial statements, such as employee benefit plans and supporting schedules.

AICPA. Before the SEC amended Rule 17a-5, audits of broker-dealers were required to be performed under generally accepted auditing standards established by the American Institute of Certified Public Accountants. AICPA CEO Barry C. Melancon issued a statement in support of the Board’s action and said it is critical that the PCAOB use risk analysis in determining which audits of broker-dealers will be included in its permanent inspection program. The Board is currently operating an interim inspection program that will help inform its decision on which broker-dealers will be subject to the permanent inspection program. The AICPA urged the Board to act expeditiously in determining the scope of that program.

The final standards include modifications that were made in response to the SEC’s final amendments to Rule 17a-5. PCAOB Chair James Doty said the final standards also benefitted from the input of commenters. The Board has seen significant compliance problems under the existing standards through its interim inspection program. Whether or not certain broker-dealers are exempt from the Board’s inspection program based on the nature of their clients, Doty said it is clear that many firms will need to improve their work, under any set of standards, to meet the SEC’s requirements and the public’s expectations.

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