Most small broker-dealers wouldn't have to pay assessments to the Public Company Accounting Oversight Board under rules proposed by the board last week.
If accepted, the rule change would be a victory for privately owned firms, that have complained about high audit costs.
The requirement that broker-dealers use PCAOB-registered auditing firms to prepare their annual financial statements for regulators was originated by the Sarbanes-Oxley Act of 2002. Smaller firms were routinely exempted until 2009, when the fallout from the Ponzi scheme run by Bernard Madoff's privately owned broker-dealer prompted regulators to tighten auditing regulations.
Although Dodd-Frank gives the PCAOB the authority to exempt certain broker-dealers from the auditing requirements, smaller firms still will have to wait for relief.
Final rules covering audits of broker-dealers — including a decision on what types of firms would be exempt — are expected in about two years, the board said.
The plan being considered last week at a PCAOB meeting also would create a mechanism of fees levied on broker-dealers to raise the $15 million a year needed for the reviews.
Dodd-Frank stipulated that the inspection fees be based on a firm's relative share of “tentative net capital.”
The burden will fall heavily on larger firms because only about 14% of broker-dealers meet the minimum net-capital threshold for being subject to the fees.
Just 640 of the 4,600 U.S. brokerage firms will pay fees to the PCAOB to cover the cost of auditing their auditors. The annual assessments would range from $400 per firm up to $1.27 million for the very largest firms, according to the board.
Dodd-Frank also eliminated a system in which auditors had to register with the PCAOB but weren't overseen by the board.
“You might view this expansion of our mandate as one of Bernie Madoff's legacies,” Daniel Goelzer, the board's acting chairman, said in a speech this month to the American Institute of Certified Public Accountants.
Broker-dealers have complained about the auditing requirement, claiming that it has raised costs and forced firms to use auditors who don't understand securities firms.
Giving small firms a pass on assessments was “a good start,” said Lisa Roth, chief executive of Keystone Capital Corp. and past chairman of the National Association of Independent Broker/Dealers Inc., who attended the PCAOB meeting.
The board “clearly doesn't know enough about broker-dealers” to begin granting exemptions from PCAOB-regulated audits, Ms. Roth said. “But I have confidence that they will get to know [the industry] well enough to issue exemptions.”
Also last week, the PCAOB released for public comment a temporary rule to establish an interim inspection program for accounting firms' audits of broker-dealers.
The interim program “will allow the board to begin inspection work on audits ... without waiting until the board can make fully informed judgments about the scope of a permanent program,” the PCAOB said in a statement.
Comments on the proposal are due by Feb. 15.
This story was supplemented with reporting from Bloomberg News.
E-mail Dan Jamieson at [email protected].
