PCAOB Finds Deficiencies in Broker-Dealer Audits

PCAOB Finds Deficiencies in Broker-Dealer Audits

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Author: Scott Hoffmann, CPA
Supervisor | Financial Services Industry Team

The Public Company Accounting Oversight Board (the PCAOB) has recently released a Staff Practice Alert reporting the results of their inspection of broker-dealer 2013 audits. The Alert reported that 71 of the 90 inspected audits contained audit deficiencies. According to the government regulator, 79 percent of broker-dealer audits overall and 56 of 60 broker-dealer audit firms had issues that rose to the level of audit deficiencies. The PCAOB has been inspecting audits of broker-dealers for the past few years under an interim program to prepare audit firms and their broker dealer clients for full implementation of PCAOB audit standards in 2014.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the PCAOB gained new powers to regulate and oversee audits of broker-dealers. Starting in June 2014, audits of broker-dealers became subject to PCAOB audit standards, which are generally more rigorous than AICPA standards. For most calendar year end broker-dealers, they will begin to see changes in audits beginning in 2014.

One particular area of deficiency noted in the practice alert was in the testing and presentation of revenue. PCAOB Chairman, James R. Doty, wrote, “Revenue is one of the largest accounts in the financial statements and an important driver of a company's operating results. Given the significant risks involved when auditing revenue, auditors should take note of the matters discussed in this practice alert in planning and performing audit procedures over revenue.”

The Alert highlighted broker-dealer revenue audit deficiencies in the following areas:

  • Testing the recognition of revenue from contractual arrangements
  • Evaluating the presentation of revenue—gross versus net revenue
  • Testing whether revenue was recognized in the correct period
  • Evaluating whether the financial statements include the required disclosures regarding revenue
  • Responding to risks of material misstatement due to fraud associated with revenue
  • Testing and evaluating controls over revenue
  • Applying audit sampling procedures to test revenue
  • Performing substantive analytical procedures to test revenue
  • Testing revenue in companies with multiple locations

Broker-dealers with December year ends should expect increased scrutiny from their auditors regarding testing of revenue in these areas as audit firms work to comply with expectations of the PCAOB.

Please contact your Keiter professional or 804.747.0000 | information@keitercpa.com for more information about this topic.

About the Author

Scott is a Senior Manager in Keiter’s Business Assurance & Advisory Services group. He provides insights and opportunities to clients in the financial services industry. His clients include broker-dealers, alternative investment funds, hedge funds, real-estate investment funds, and other financial institutions.  Scott is a member of Keiter’s Financial Services Industry team.  Read more of Scott’s articles on our blog.

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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.


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