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PCAOB Report: 'Unacceptably High' Deficiency Rates in Broker-Dealer Audits

S.J. Steinhardt
Published Date:
Aug 22, 2022

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A report by the Public Company Accounting Oversight Board (PCAOB) found an “unacceptably high” audit/attestation engagement deficiency rate of 78 percent among firms that perform audits of broker-dealers in 2021, which was consistent with the 2020 rate, but there is some good news, too: The PCAOB identified deficiencies in quality control systems only in about half of the firms inspected, down from two thirds in 2020.

The PCAOB found that the majority of deficiencies in both years were related to engagement quality reviews, Accounting Today reported, also noting that “PCAOB inspections found that firms that audited 100 or fewer broker-dealers had higher percentages of audit engagements with identified deficiencies, compared to the results for firms that audited more than 100 broker-dealers.”

For its report, the PCAOB selected 50 firms for inspection in 2021, roughly three quarters of the number inspected in the previous two years, for a total of 92 audits.

The firms were selected from 345 PCAOB-registered firms that performed audits of certain SEC-registered broker-dealers with financial statement periods that ended during the period April 1, 2020, through March 31, 2021, comprising a total of 3,418 audits across all firms in its designated category.

The Report’s “Observations From Inspections” section recommended "good practices that may be effective to address various scenarios" in a number of areas: attestation and audit engagements; information technology controls related to the financial responsibility rules; and customer reserve computation. Each section was then tested for compliance under the scenario. After each test, deficiencies were highlighted and corrective actions were recommended.

“For firms that audited 100 or fewer broker-dealers, the percentage of audit engagements with identified deficiencies declined to 60 percent from 71 percent in 2020 and 84 percent in 2019," the report said. “For firms that audited more than 100 broker-dealers, the percentage of audit engagements with identified deficiencies declined to 32 percent in 2021 from 38 percent in 2020 and 41 percent in 2019. The percentage of examination engagements covered where we identified one or more deficiencies declined slightly, to 64 percent of engagements in 2021 from 67 percent in 2020, but remained high, primarily due to deficiencies in testing internal control over compliance.”

The annual reports commenced in 2011, when the PCAOB was authorized to establish an inspection program for auditors of broker-dealers under the Dodd-Frank Act of 2010, a response to abuses that came to light during the 2008-09 financial crisis. The PCAOB has continued to increase its inspections of firms that audit broker-dealer clients in the years since the passage of the law.

supplement to the report contains more detailed information about the firms selected for inspection, as well as more details pertaining to the results themselves.

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