Will small B-Ds get a pass on audit reg?

The Public Company Accounting Oversight Board is gearing up to charge broker-dealers the cost of overseeing the auditors who prepare financial statements for securities firms. The PCAOB will be considering interim rules for an inspection and funding program for broker-dealer audits at a board meeting tomorrow. Assessment levels will be charged in proportion to a broker-dealer's net capital compared to the total net capital of all firms. It's unclear exactly what the assessments will be. The PCAOB's total "accounting support" fees for 2011 are budgeted at $202.3 million, with broker-dealers set to pay $14.4 million of that amount. Public companies pick up the rest. Observers in the brokerage community are hoping that the PCAOB will eventually exempt small firms from having to hire a PCAOB auditor — a cost that's far higher than the new assessments are likely to be for most firms. In a speech last week, acting PCAOB chairman Daniel Goelzer indicated that he's leaning toward exempting smaller firms — but not immediately. "The information-gathering aspect of the interim inspections will help the [PCAOB] decide on possible exemptions," Mr. Goelzer said. A spokeswoman for the PCAOB declined to comment before the meeting tomorrow. An exemption would be "good for small firms," said Lisa Roth, chief executive of Keystone Capital Corp. and past chairman of the National Association of Independent Broker/Dealers Inc., who has been urging the PCAOB to grant exemptions. She said smaller brokerage firms have seen the fees they pay auditors go up 25% to 45% as a result of having to use a PCAOB-registered auditor. Under the Sarbanes-Oxley Act of 2002, broker-dealers are required to use a PCAOB-registered firm in preparing their annual financial statements for regulators. Until 2009 the Securities and Exchange Commission had exempted privately owned brokerage firms from that requirement, but the agency ended a series of exemptions in the wake of the Bernard Madoff scandal. Under the Dodd-Frank Act, the PCAOB was given authority to exempt auditors of broker-dealers from registering if the brokerage firms do not hold assets in custody. In his speech last week, Mr. Goelzer noted that many brokerage firms are "introducing firms that, at least in theory, do not have access to client funds or securities." The large numbers of smaller firms that do not hold assets in custody or clear trades raises "questions about whether we should devote resources to inspecting the auditors of all [firms] or whether some of their auditors can safely be exempted from PCAOB oversight," he said.