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Auditors Take the Stage

July 15, 2011

Photo by Seattle Municipal Archives. Some rights reserved.

Last month, on June 15th, the SEC published for comment proposed amendments to Rule 17a-5, the broker-dealer financial reporting rule under the Securities Exchange Act of 1934. As required by the Dodd-Frank Act, the amendments are meant to prevent another Ponzi scheme like that perpetrated by Bernard Madoff, by focusing auditor attention on broker-dealer custody practices. To that end, the SEC’s amendments require broker-dealers that either clear transactions or carry customer accounts to allow the Commission and others to review work papers of the accounting firm that audits the broker-dealer.

This week, on July 12th, the Public Company Accounting Oversight Board (“PCAOB”) proposed attest and audit standards for the auditors reviewing broker-dealer compliance with Rule 17a-5, as proposed for amendment. 

The Attestation Standards. The Attestation Standards consist of two parts: Examination Engagements Regarding Compliance Reports of Brokers and Dealers (“examination engagements”) and Review Engagements Regarding Exemption Reports of Brokers and Dealers (“review engagements”).

Examination Engagements. The SEC’s proposed amendments would require broker-dealers to include in their annual report an examination report from their accountant regarding the assertions made by the broker-dealer concerning its compliance with Rule 17a-5’s financial reporting requirements. The PCAOB’s examination engagement standard would establish requirements for examining the assertions in a broker’s or dealer’s compliance report.

The proposed examination standard also provides procedural requirements for auditors establishing a risk-based approach for the examination, focusing the auditor on the matters that are most important to the auditor’s conclusions regarding the broker-dealer’s assertions.

Review Engagements. Broker-dealers claiming an exemption from the requirements of the rules regarding the safeguarding of customer assets must identify the basis for the exemption and file an exemption report. The PCAOB’s proposed review engagement standard would establish requirements for making inquiries and performing other procedures to obtain moderate assurance that the broker- dealer meets the identified conditions for an exemption.  These procedures include evaluating relevant evidence obtained from the audit of the financial statements and supplemental information.  They are designed to enable the auditor to scale the review engagement based on the broker-dealer’s size and complexity.

Both of the proposed attestation standards include provisions requiring auditors to consider fraud risks, including the risk of misappropriation of customer assets.

The Auditing Standard. The Auditing Standard would apply when the auditor of a broker-dealer’s financial statements is engaged to audit and report on supplemental information that accompanies the audited financial statements. Such supplemental information includes the supporting schedules prepared in accordance with Rule 17a-5.

The proposed standard establishes procedural and reporting responsibilities requiring the auditor to perform certain audit procedures to test and evaluate the supplemental information.

Comments on either the Attestation Standards or the Audit Standard should be submitted on or before September 12, 2011.

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