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Deficiency Rates in Broker-Dealer Audits Increased in 2022, PCAOB Says

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Rising deficiency rates in audits of broker-dealers “are a cause for significant concern,” the Public Company Accounting Oversight Board (PCAOB) stated in a report that summarizes 2022 inspection findings.

The board noted that 58 percent of audits reviewed had problems in 2022. This is up from 49 percent in 2021. The audit deficiency rate is 70 percent for combined 2014 to 2022.

Dodd-Frank gave the PCAOB authority to inspect audits of broker-dealers and has been inspecting them under an interim program for about a decade. PL111-203

The PCAOB also found 50 percent of examination engagements reviewed had deficiencies last year. This compares with 64 percent in 2021.

In addition, the board found 40 percent of review engagements inspected had deficiencies in 2022. In 2021, it was 28 percent.

Furthermore, audit firms could do a better job of complying with independence requirements.

In 2022, the PCAOB inspection observed 11 percent deficiency rate. It was 0 percent in 2021. The findings for combined 2014-2022 is 8 percent.

Most concerning is the 90 percent deficiency rate in audit and or attestation engagements in 2022. In 2021, this deficiency rate was 78 percent.

The 2022 results follow overall deficiency rates that remained “unacceptably high, despite the improvement in 2021 inspection results.” (See PCAOB on Inspections of Broker-Dealer Audits: ‘Overall Deficiency Rates Remain Unacceptably High’ in the Aug. 29, 2022, edition of Accounting & Compliance Alert.)

The PCAOB published the 2022 inspection findings of broker-dealer audits on Aug. 10, 2023. At the same time, the board issued a supplementary report that breaks down the inspection findings in more detail.

The PCAOB said that the key drivers of the high rate of deficiencies are:

  • Audit engagements showed persistently high deficiencies related to revenue.
  • Audit engagements showed increases in deficiencies related to net capital supplemental information, auditors’ reports and audit documentation.
  • Review engagements showed increases in deficiencies related to the auditor’s consideration of evidence that appeared to contradict statements included in exemption reports.
  • Review engagements showed increases in deficiencies related to review reports.

Notable exceptions were:

  • Audit engagements showed decreases in deficiencies related to customer protection supplemental information and going concern.
  • Examination engagements showed a decrease in deficiencies related to testing internal control over compliance.

The PCAOB does not inspect all audits. Which audits to review are largely based on risk assessment. But the board also reviews a small number of engagements based on random selection.

In 2022, there were 305 firms that audited broker-dealers, and there were 3,400 broker-dealer audits combined.

“Our selections of firms for inspection and engagements for review do not constitute representative samples of the populations of firms that audit broker-dealers or broker-dealer engagements,” the report states. “Additionally, our inspection findings are specific to the particular portions of the engagements reviewed. They are not an assessment of all work performed by the firms selected for inspection or of all procedures performed in the engagements reviewed.”

In 2022 and 2021, the board inspected 50 firms. In 2020, it was 65 firms.

Of the 650 broker-dealer audits in the “more than 100” category, 539 were audited by the four firms that also audited more than 100 issuers in 2022.

Of the 50 accounting firms selected for inspection in 2022, four firms audited more than 100 broker-dealers and more than 100 publicly-traded operating companies, or 8 percent of firms reviewed last year.

There was one firm that audited more than 100 broker-dealers but fewer than 100 issuers.

The rest, or 45 firms, audited fewer than 100 broker-dealers.

Of those, the PCAOB reviewed 92 audit engagements, 34 examination engagements and 52 review engagements.

Of the 92 selected audit engagements, 86 were risk-based and six were random selections.

The inspection staff found 58 percent of audits selected for review based on risk assessment had deficiencies. By contrast, the deficiency rate for random selection was 50 percent.

The supplemental report summarizes deficiencies by audit area and attestation engagement.

For example, the report notes deficiency rates in audits of financial statements related to the sufficiency or appropriateness of evidence of the following:

  • Revenue—34 percent
  • Evaluating audit results—21 percent
  • Related-party relationships and transactions—33 percent
  • Expense and related accruals—29 percent
  • Securities owned and securities sold, not yet purchases—50 percent
  • Receivables and payables—13 percent
  • Post-audit matters—100 percent
  • Going concern—0 percent
  • Materiality consideration in planning and performing an audit—0 percent

“The most notable increases in the percentage of engagements with deficiencies in 2022, compared to 2021 and 2020, occurred in the areas of audit documentation and auditors’ reports on financial statements and supplemental information,” the supplemental report noted. “The increases in the percentage of engagements with deficiencies in 2022 in the areas of consideration of fraud in a financial statement audit and post-audit matters relate to two engagements and one engagement, respectively.”

The main broker-dealer annual report includes sections that discuss good practices.


This article originally appeared in the August 17, 2023 edition of Accounting & Compliance Alert, available on Checkpoint.

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