Firms that audit public company financial statements have some work to do to satisfy regulators on their capacity to properly audit brokers and dealers that are registered with the Securities and Exchange Commission.

The Public Company Accounting Oversight Board recently issued some broad findings about its interim inspections of audit reports for broker-dealers as it continues to ramp up its oversight as established under Dodd-Frank. The board said from March through December of 2012, it inspected portions of 60 audits across 43 audit firms that are registered to audit broker-dealer financials. Inspectors found problems at every audit firm, and in 95 percent of all the audits examined. The inspection sample included every Big 4 and second-tier firm that is already inspected annually, plus 11 other firms that are already subject to routine inspection because of their work for SEC filers.

PCAOB member Jay Hanson says inspectors spotted many deficiencies in testing procedures related to customer protection and net capital under SEC rules. Other common trouble spots included audit procedures related to financial statement areas, including procedures regarding tests of revenue, related parties, and the risk of material misstatement due to fraud. “Those are all the same things we see with firms that are inspected because of their public company practice,” says Hanson. 

The board also noted a common problem with audit firms not establishing adequate independence from the brokers and dealers they audit. Audit firms too often were too deep into the preparation of the financial statements, the board noted, a common practice that is allowed for private companies but not for those registered with the SEC. The board said the independence problem was most acute among firms that are not already inspected by the PCAOB to perform audit work for issuers.

Hanson says every audit firm should review the PCAOB's latest report and consider whether inspectors would find the same issues in their own audit work. Specifically, he says audit firms should review their engagements and quality control procedures to assure they are not violating independence rules, review guidance and training to determine whether issues spotted by inspectors are getting due attention, and check on their policies for supervision and review to assure partners and supervisors are addressing key issues.

The PCAOB is targeting 2014 to 2015 to establish permanent rules on inspecting broker-dealers, after which it may issue reports on its findings at individuals firms, as it does for public company auditors. Hanson says the board has not yet determined whether it might issue separate reports on public company audits and broker-dealer audits, or perhaps issue a single report for each firm reflecting audit work in both areas.