Broker-Dealers May be on the Hook for Inadequate Audits

Posted on 11.02.17

Broker-Dealers May be on the Hook for Inadequate Audits

While some independent auditors may advertise low fees to entice broker-dealer clients for their annual audits, broker-dealers should be wary of going with the lowest bidder, as significant additional costs can be incurred if the low-cost auditor is deemed to have performed an inadequate audit. Based on the quality of the audit work performed by the auditor, broker-dealer clients could get stuck with the tab, both financially and in time and effort by broker-dealer staff, for additional audit procedures not performed by the low-cost auditor. If the audit is deemed to be inadequate, the broker-dealer may be required to restate and reissue their annual financial reports. 


Every year the Public Company Accounting Oversight Board (the “PCAOB” or the “Board”), which is charged with oversight of auditors of public companies, including all broker-dealers registered with the SEC, performs sample inspections of broker-dealer audits. In August 2017, the PCOAB released its findings for 2016 inspections.

The inspection results revealed that many broker-dealer audits contained deficiencies. Deficiencies were observed in the audits of 73 of the 75 auditors inspected, including 96 of the 115 audits covered by the inspections, increasing from 77 percent of audits inspected in 2015 to 83 percent in 2016. As always, the Board inspections focused on specific areas of the audits that have been deemed to be more risky. 

Areas reviewed closely by the Board inspectors included:

  • Auditor independence

  • Revenue testing

  • Assessment and response to material misstatement due to fraud

  • Financial statement preparation and disclosure

  • Fair value measurements

  • Related party transactions

Although the individual auditors’ results of the Board’s inspections are not made public, there may be circumstances where an audit deficiency discovered during an inspection could lead to the broker-dealer having to re-issue amended financial statements. That is, if the inspected auditor concludes that a required auditing procedure was omitted from the audit of the financial statements and that such omission impairs the auditor’s ability to stand by its previously issued audit report on the broker-dealers financial statements, the auditor must promptly perform the omitted audit procedure. 

If, after the performance of the omitted audit procedure, the auditor discovers the previously issued and submitted financial statements were materially misstated, the auditor may require the broker-dealer to restate and reissue the financial statements once the complete audit procedures are performed.  This will result in significant additional fees and expenses not originally contemplated by the broker-dealer in order to correct their financial statements.

In order to avoid possible restatement and reissuance of annual financial statements, broker-dealers should ensure their independent accountant has expertise in the complexities of the broker-dealer regulations, and has a history of clean PCAOB inspection reports.

Broker-dealers can view the public portion of their auditor’s most recent inspection report here.

 

Have you had a recent broker-dealer audit and have questions on this topic? We can help. Contact your Keiter representative or Email | 804.747.0000

Posted by: Scott Hoffmann, CPA

Scott is a 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.