SEC wants auditors to be tougher on B-Ds

Stronger audit reports needed to keep tabs on firms with custody

Dec 12, 2010 @ 12:01 am

By Bloomberg News

The Securities and Exchange Commission wants to enlist the accounting industry to help restore investors' trust in financial markets by boosting oversight of broker-dealers.

The agency is looking to “leverage the profession” by updating a 30-year-old broker-dealer custody rule that requires auditors of firms that control client assets to give assurance that reported numbers are accurate, SEC Chairman Mary Schapiro said last week in a speech at an American Institute of Certified Public Accountants conference in Washington.

As part of the plan, Ms. Schapiro said, the commission is laying the groundwork for implementing new powers spelled out in the Dodd-Frank Act that call for the Public Company Accounting Oversight Board to inspect auditors of all broker-dealers.

The SEC is expanding scrutiny of broker-dealers after investors lost billions of dollars in a Ponzi scheme conducted by Bernard Madoff, whose investment advisory firm also acted as a custodian. The agency last December voted to require that money managers who hold customer cash and securities be subjected to surprise inspections.

“We continue to demonstrate our willingness to prosecute those who betray the trust of the public markets,” Ms. Schapiro said. “But bringing actions after the fact is no substitute for full and honest disclosure at the outset. Enforcement actions are cold comfort for investors who lost their savings after relying on misrepresentations or half-truths.”

Mr. Madoff, 72, who was arrested in December 2008 after confessing to the Ponzi scheme, is serving a 150-year prison sentence.

The accounting industry will play a crucial role in helping investors regain confidence in the wake of his scheme and the 2008 financial crisis, said Ms. Schapiro, who urged auditors to push for accuracy and clarity in reporting.

“Our markets depend on confident investors — and their confidence rests in large part in your hands,” she told the attendees at the conference. “The SEC and other agencies can increase the confidence investors bring to our financial markets, but our efforts will succeed only if those investors believe the numbers that you write on the bottom line.”

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