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Attestation and Audit Standards Are Adopted for Broker-Dealer Reporting

Oct 11, 2013

The PCAOB on October 10, 2013, adopted three standards covering reviews of broker-dealer reports.

The standards include Attestation Standard No. 1, Examination Engagements Regarding Compliance Reports of Brokers and Dealers, which sets rules for auditors examining broker-dealer compliance reports.

Attestation Standard No. 2 Review Engagements Regarding Exemption Reports of Brokers and Dealers, establishes requirements for an auditor’s review of a broker-dealer claiming an exemption from SEC reporting rules covering the safety of client assets.

Auditing Standard (AS 17) No. 17,Auditing Supplemental Information Accompanying Audited Financial Statements, outlines an auditor’s responsibility for the supplemental information that accompanies a broker-dealer’s audited financial statements. The standard also applies to audits of other organizations, such as employee benefit plans that have to file audited financial reports with the SEC and schedules that follow the Employee Retirement Income Security Act of 1974. AS 17 is intended to shore up the reliability of the supplemental information.

PCAOB standards have to be approved by the SEC. If the agency signs off relatively quickly, the standards will be in effect for fiscal years that end June 1, 2014, and later.

The federal government shutdown has placed some uncertainty around the SEC’s ability to act. If the shutdown drags on into late October, the agency may have to implement a contingency plan and operate with a small fraction of its normal staff size.

“The standards… will strengthen procedures for auditors and improve the reliability of annual reports required by the SEC for oversight of customer assets held by broker-dealers,” said PCAOB Chairman James Doty in a prepared statement.

The reforms are part of the PCAOB’s response to the Bernard-Madoff scandal. Madoff’s theft of client assets was aided by his use of a single-partner accounting firm operating from a small office in a suburban strip mall. The auditor never bothered to review Madoff’s accounts or verify the existence of the securities that were reported on client statements.

The 2010 Dodd-Frank reforms expanded the PCAOB’s authority over auditors of broker-dealers. Sec. 982 of PL111-203

Attestation Standard No. 1 establishes requirements for auditors reviewing reports filed by broker-dealers. Earlier this year, the SEC strengthened the requirements of Rule 17a-5 of the Securities Exchange Act of 1934, with the publication of Release No. 34-70073,Broker-Dealer Reports.

The amended reports address compliance with the SEC’s fiduciary responsibility rules, and the PCAOB’s standards establish the processes an auditor has to follow for reviewing the reports.

AS 17 applies to an auditor’s responsibility for reviewing the supplemental information that broker-dealers file with the SEC along with their financial reports.

The standards were a long time in the making. The board proposed them in July 2011. After the SEC approved its amendments to Rule 17a-5 in July, the PCAOB’s path to finishing its standards opened up.

Previously, Rule 17a-5 required auditors to comply with the AICPA’s auditing standards.

“Both attestation standards emphasize coordination between the examination or review engagement, the audit of the broker-dealer’s financial statements, and audit procedures performed on the supplemental information,” said Martin Baumann, the board’s chief auditor and director of professional standards. “This emphasis on coordination can promote overall audit effectiveness and avoid redundancy in the work performed.”