The biggest U.S. broker-dealers will have to pay more than $1 million a year to finance inspections of the firms that audit them under a regulatory program prompted by revelations related to Bernard Madoff's Ponzi scheme.
The Public Company Accounting Oversight Board voted 5-0 today to establish a temporary system for monitoring auditors of broker-dealers that will give the Washington-based watchdog time to determine what a permanent system should look like.
“If we find violations of law, we won't wait to act on them,” Chairman James R. Doty said in remarks before the vote. “We will use our disciplinary authority in any appropriate cases of auditor misconduct.”
The PCAOB's new program requires U.S. broker-dealers to fund the estimated $14.4 million inspections program, which could amount to more than $1 million for the largest firms. The board said 640 brokerages will be charged this year, with fees assessed in proportion to a firm's net capital. The fee structure was also passed by the board with a 5-0 vote.
Companies such as
Goldman Sachs Group Inc. and Morgan Stanley can expect the new fees to be assessed on their broker- dealers, separately from fees already assessed on parent companies for the PCAOB's existing public-company audit inspections.
Lawmakers included expanded oversight of broker-dealers in the Dodd-Frank Act last year after it was revealed that Madoff conducted his multibillion-dollar fraud while his brokerage was being audited by a small firm operating out of a 13-by-18-foot storefront. The regulatory overhaul eliminated a system in which auditors had to register with the PCAOB but weren't overseen by the panel.
Non-Custodial Auditors
A group of U.S. House members who are also accountants urged the PCAOB in a Feb. 14 letter to focus the program on brokers who have custody of client assets, not those who don't.
“We urge the PCAOB to act quickly to begin an effective and targeted inspection program over these auditors,” the lawmakers wrote.
The board focused much of its discussion today on whether or not auditors of “introducing” broker-dealers, or those who don't hold client funds, should be exempted in the permanent program.
“We may be able to narrow the scope and cost of the law to focus on areas where our oversight would make a difference,” Doty said.
Permanent Program
Inspections under the temporary program won't produce public reports on individual firms, and most broker-dealer auditors won't see inspectors in that time. The permanent program is expected to be established in 2013.
The PCAOB, a nonprofit corporation funded by fees on public companies, regulates and inspects about 2,500 registered auditors under the authority of the Securities and Exchange Commission. Board votes need to be approved by the SEC, which is scheduled to consider a related rule change tomorrow.
In other business at today's meeting, the board raised the threshold for the size of public companies charged fees to fund the PCAOB's wider inspections program. The board moved the minimum from $25 million in market cap to $75 million, relieving about 1,100 smaller companies from the fees. For investment companies, which carry a higher threshold, the board moved it from $250 million to $500 million.
--Bloomberg News--
