B-D auditors overlook accounting lapses

AUG 29, 2012
Broker-dealer auditors failed to ascertain whether firms maintained appropriate internal accounting controls, segregated customer funds and kept sufficient minimum capital reserves, according to a review by a federal agency. Last Monday, the Public Company Accounting Oversight Board released an interim report about the new authority over broker-dealer auditors given to it by the Dodd-Frank financial reform law. The survey of 10 audit firms and 23 broker-dealer audits between October and February shows that in 21 cases, “firms failed to perform sufficient audit procedures” and that two of the nine broker-dealers who were supposed to maintain a customer reserve failed to do so. In seven of the 23 audits, the PCAOB found that auditors failed to test the broker-dealer's net capital calculation. In addition, the PCAOB report indicates that in 13 of the 23 audits, examiners didn't properly assess the risk of financial statement errors, while in 15 of 23 audits, they failed to sufficiently test revenue claims. In two instances, the firm doing the audit was also the broker-dealer's provider of financial and accounting reporting services, a violation of SEC rules. “PCAOB inspectors identified deficiencies in all of the audits inspected,” PCAOB board member Jeanette Franzel said during a media conference call. “While the auditors and audits selected are not representative of all broker and dealer audits and their auditors, the results are of concern to the board,” she said. “The results indicate that in the audits that we inspected, the auditors were not properly fulfilling their responsibilities to provide an independent check on brokers' and dealers' financial reporting and compliance with SEC rules.” The PCAOB was established under the Sarbanes-Oxley Act to regulate accounting firms that audit public companies. The Dodd-Frank law also gave the agency oversight over auditors of SEC-registered broker-dealers. Before the final Dodd-Frank rules are written, the PCAOB is using the interim reviews to calibrate its exam procedures and determine problem areas, according to Daniel Nathan, a partner at Morrison & Foerster LLP. “It's a good thing that they're letting the industry and the world know before the real program gets going,” said Mr. Nathan, a former vice president and director of regional enforcement at the Financial Industry Regulatory Authority Inc. and a former assistant director of the Securities and Exchange Commission's Division of Enforcement. The audits in the interim report involved nine broker-dealers that had special reserve bank accounts and minimum capital requirements of between $250,000 and $6.5 million. The other 14 broker-dealers had no special reserve accounts and had to maintain between $5,000 and $6 million in net capital. By the end of the interim inspection program next year, the PCAOB will have reviewed 100 broker-dealers and 170 audits. The effort will help shape the permanent inspection program that will go into effect when the SEC approves final Dodd-Frank rules on audits. The timeline is unclear. “The findings tell us that there is a need for improvement in the audit work being performed and that other auditors of broker-dealers should look closely at our findings and assess their own work,” said PCAOB member Jay Hanson.

HOPES TO PLAY A ROLE

The Dodd-Frank law beefed up the oversight of broker-dealer auditors in part to prevent another investor scam such as the $65 billion Ponzi scheme perpetrated by Bernard Madoff. That scandal involved improper custody and use of customer money. The PCAOB hopes to play a role in stopping the next big ripoff. “This is part of that process,” Ms. Franzel said of the interim report. “It's a journey.” Mr. Nathan said that the highlighted problems may not necessarily have to do with malfeasance. “Given that [broker-dealers] haven't been subject to this scrutiny, it's allowed some bad habits to develop over the years,” he said. “I'm hoping that these results show a certain degree of sloppiness and inattention to financial details, and don't speak to outright fraud.” [email protected] Twitter: @markschoeff

Latest News

The fight over the CFPB is just beginning
The fight over the CFPB is just beginning

Locked out of their offices and told to stay home, employees at the Consumer Financial Protection Bureau have asked the courts to intervene as Elon Musk and Republican leaders move to shut down the agency that was established to protect people from predatory lending and financial scams.

Business-focused wealth tech RISR lands $8B Wealthcare Capital Management partnership
Business-focused wealth tech RISR lands $8B Wealthcare Capital Management partnership

Fintech platform interVal has also introduced a new feature to help advisors support entrepreneurial business owner clients better.

LPL boosts revenue potential with amped-up alts platform
LPL boosts revenue potential with amped-up alts platform

Along with greater revenue, alternative investments also carry risks, one industry lawyer noted.

How SageSpring Wealth Partners' next-gen strategy has fueled its success
How SageSpring Wealth Partners' next-gen strategy has fueled its success

President Jeff Dobyns unpacks the strategic power of mentorship, what makes an "ideal team player," and how the firm's 89 percent success rate has paid off for veteran advisors.

Powell heads for hot-seat hearings with ongoing pressure from Trump policies
Powell heads for hot-seat hearings with ongoing pressure from Trump policies

The Fed chair is in for some "hyper-charged" meetings, with legislators likely to raise questions on tariff threats and apparent steps to comply with anti-DEI orders.

SPONSORED Taylor Matthews on what's behind Farther's rapid growth

From 'no clients' to reshaping wealth management, Farther blends tech and trust to deliver family-office experience at scale.

SPONSORED Why wealth advisors should care about the future of federal tax policy

Blue Vault features expert strategies to harness for maximum client advantage.