Broker-dealers have one of the most complex and regulated jobs in the financial services industry. So, it should be no surprise that the auditing of broker-dealers requires unique focus and attention. To remain transparent and above the board, broker-dealers must select an auditing firm that has the relevant knowledge, skill, and ability to audit broker-dealers.

One of the ways to select an appropriate audit firm is by keeping a sharp eye on audit quality inspections. After all, you should want to engage trustworthy auditors who conduct technically accurate procedures. But keeping up-to-speed on technically accurate audit procedures can be difficult when you’re not a financial statement auditor. Reviewing the latest audit quality inspection report issued by the Public Company Accounting Oversight Board (PCAOB), a nonprofit corporation set up by U.S. Congress to oversee the audits of public entities, including broker-dealers, can help you with your audit quality evaluation.

When analyzing audits of broker-dealers for its report, the PCAOB ensures auditors are following the rules, treating clients fairly, and establishing best practices. The latest annual report, focusing on the inspection of audit firms in 2020 may provide a roadmap that guides your future broker-dealer auditor selection.

A Look at the Report

The PCAOB reported the number of firms that had one or more audit and/or attestation engagements with deficiencies was 78%. While high, the deficiency rate actually dropped 14% from the previous year’s inspection report of audits conducted in 2019.

For firms that audit issuers, the PCAOB noted a 51% deficiency rate versus an 81% deficiency rate for firms that did not audit issuers. And only 12% of areas (i.e., revenue or related parties, or going concern) reviewed had deficiencies for those firms that also audit issuers versus 30% for those firms that did not.

In the inspection report, the PCAOB indicated that approximately 61% of engagements reviewed had audit deficiencies. The most frequent audit areas with deficiencies were revenue and adopting the leasing standard (ASC Topic 842). Presentation and disclosure of financial results, related party transactions, and evaluating going concern were also higher.

Knowing these deficiency rates—and the causes—can help you determine what kind of questions to ask when conducting an audit firm search.

Choosing the Right Audit Firm

Like anyone else in any other profession, the last thing a broker-dealer wants is to be investigated for misdoing. Due to the complex and highly regulated nature of your workload, there may be oversights, easy mistakes, misinformation, or confusion which could create a perfect storm for inaccuracies to occur. An audit can help discover those danger zones, allowing you to fix any problem that arises. Plus, it will enable you to stay in compliance with regulations and maintain accurate documentation.

When selecting an auditor, you may want to ask the following questions:

What is the firm’s experience with auditing broker-dealers?

Audits conducted on broker-dealers usually focus on adequate documentation and understanding of U.S. Generally Accepted Accounting Principles (US GAAP) and SEC rules. You will want to look for a firm that has experience with SEC rules and auditing standards under the PCAOB. Given the correlation in overall audit quality in the 2020 inspections between the firms that audit issuers versus firms that do not, you may also want to ask whether an audit firm also audits issuers.

What is the firm’s approach for auditing high risk areas?

Every industry poses unique risk factors during an audit, which the audit firm should understand from the start of the engagement. Ask your prospective auditors about their approach for testing areas that are unique to broker-dealers. You may also want to ask about those areas that had deficiencies in the 2020 audit inspections, such as revenue, leases, going concern, and related party transactions. Auditors are likely taking a "lessons learned" from the audit quality report as well and may be already planning to devote particular energy to the areas of testing where the PCAOB found deficiencies

Next Steps

Be sure to discuss the 2020 PCAOB inspection report with your auditor to see how it could affect your next audit. And of course, take advantage of resources such as the PCAOB reports and the auditor search. For more information about how to select a quality auditor, please contact us.

Published on October 09, 2021