Broker-Dealer Audits: Tackling Pervasive Deficiencies Identified by - - PowerPoint PPT Presentation

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Broker-Dealer Audits: Tackling Pervasive Deficiencies Identified by - - PowerPoint PPT Presentation

Feb 25, 2023 175 likes •713 views

Broker-Dealer Audits: Tackling Pervasive Deficiencies Identified by PCAOB TUESDAY, MARCH 25, 2014, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours . To earn credit you must: Attendees must listen

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Broker-Dealer Audits: Tackling Pervasive Deficiencies Identified by PCAOB

TUESDAY, MARCH 25, 2014, 1:00-2:50 pm Eastern

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SLIDE 2

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SLIDE 3

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Broker-Dealer Audits: Tackling Pervasive Deficiencies Identified by PCAOB

Addressing Auditor Independence, Related-Party Transaction Challenges, Deficiencies in Applying SEC Net-Capital Rules and More

MARCH 25, 2014 Kevin Breard Breard & Associates kbreard@baicpa.com John T . Hague McGladrey John.Hague@mcgladrey.com

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Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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Kevin G. Breard, CPA Breard & Associates, Inc. March 25, 2014

6

Broker-Dealer Audits: Tackling Pervasive Deficiencies Identified by PCAOB

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SLIDE 7

7

 Are CPA firm’s deficiencies on PCAOB’s radar?

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SLIDE 8

Protecting Investors Requires a Strong PCAOB Commissioner Luis A. Aguilar U.S. Securities and Exchange Commission SEC Open Meeting, Washington, D.C.

  • Feb. 5, 2014

8

 “Additional concerns were raised by the PCAOB’s 2013

progress report on the interim inspection program for firms that audit broker-dealers.

 That report noted that 95% of the audits selected for

inspection had deficiencies.

 In fact, deficiencies were found in one or more of the

audits conducted by each of the firms inspected.

 It is particularly troubling that, in 37% of the broker-

dealer audits selected for inspection, auditors appeared to have been involved in the preparation of the very financial statements they audited, a violation of the independence required by SEC rules.”

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9

 Is the PCAOB funded for their mission?

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Protecting Investors Requires a Strong PCAOB Commissioner Luis A. Aguilar U.S. Securities and Exchange Commission SEC Open Meeting, Washington, D.C.

  • Feb. 5, 2014

10

 “Today, we consider the PCAOB’s budget to

fund its operations for the fiscal year ended December 31, 2014. I support the PCAOB’s 2014 budget and the accounting support fee because, in my view, the budget provides the PCAOB with an appropriate level of resources to fulfill its mission and because the PCAOB has demonstrated an ability to use those resources prudently.”

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SLIDE 11

Overview

11

 How many CPA firms audited broker-

dealers with the SEC as of December 31, 2011?

 A.

800

 B. 1,000  C.

1,250

 D. 1,500

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SLIDE 12

Overview

12

Source: PCAOB Release No 2013-006 August 19, 2013

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SLIDE 13

Inspection Report 1

13

 Observation

 Almost 50% of audits are prepared by one-

  • ff firms (46%)

 5 or less greater than 80% (46% + 37%)

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Inspection Overview

14

1st 2nd 3rd Report date August 2012 August 2013 ? # of firms 10 43 60 * # of audits 23 60 90 * * anticipated

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15 PCAOB Forum on Auditing Smaller Broker-Dealers November 8, 2012 San Diego, CA

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16 PCAOB Forum on Auditing Smaller Broker-Dealers November 8, 2012 San Diego, CA

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Inspection Report 1

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 Exemption form Rule 15c3-3 Customer Protection  Auditor  Did not perform sufficient inquiries  Or other procedures

Audit Reports Tested Insuffici nt Procedu es % 14 14 100%

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18 PCAOB Forum on Auditing Smaller Broker-Dealers November 8, 2012 San Diego, CA

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Areas of High Risk

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 Net capital rule

 Audit failed to test components of net capital

computation

 Fair value

 Insufficient procedures

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What does that mean, failed to test components of net capital?

21

 Insufficient testing

Haircuts Classification allowable/non-allowable Early warning notification. Means 120%

net capital $5,000, early warning $6,000.

Material inadequacy

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What does insufficient procedures mean for Fair Value Measurement?

22

 Firms failed to test the valuation of

securities.

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23 PCAOB Forum on Auditing Smaller Broker-Dealers November 8, 2012 San Diego, CA

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24 PCAOB Forum on Auditing Smaller Broker-Dealers November 8, 2012 San Diego, CA

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25 PCAOB Forum on Auditing Smaller Broker-Dealers November 8, 2012 San Diego, CA

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26 PCAOB Forum on Auditing Smaller Broker-Dealers November 8, 2012 San Diego, CA

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27 PCAOB Forum on Auditing Smaller Broker-Dealers November 8, 2012 San Diego, CA

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Six Most Common Mistakes

28

 First Report  1. Accountant’s

Supplemental Report

  • f Material

Inadequacies

 2. Revenue

Recognition

 3. Consideration of

Risks of a Material Misstatement due to Fraud

 Second Report  1. Same  2. Same  3. Same

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Six Most Common Mistakes (continued)

29

 First Report  4. Establishing a

basis for Reliance on Records and Reports

 5. Related Party

Transactions

 6. Financial

Statement disclosures

 Second Report  4. Same  5. Financial

Statement disclosures

 6. Related Party

Transactions

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Results of 2012 PCAOB Broker-Dealer Inspections

John Hague, Financial Services Industry Leader

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Inspection Program

  • Objectives:
  • Assess compliance
  • Permanent program scope
  • Status:
  • 2 Progress reports
  • Plans for 2014 and beyond

32

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Inspection Process

  • Screening
  • Planning
  • Communication and scheduling
  • Planning week
  • Inspection week
  • Wrap-up/comment form issuance
  • Firm response
  • Reporting

33

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Inspection Process - Focus Areas

  • Mandatory
  • Presumptively mandatory
  • Conditional
  • Screening

34

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Inspection Process – Team Structure

  • Planning team
  • Inspection team
  • Reviewers

35

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SLIDE 36

Independence

  • Deficiencies in 22 of the 60 audits
  • 3 by auditors of issuers (triennially)
  • 19 by auditors of non-issuers
  • Auditors of broker-dealers subject to SEC

independence requirements: REG S-X Rule 2.01

  • Financial statement preparation

36

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SLIDE 37

Polling Question

Yes or No: The BD FINOP asks the engagement team for help in calculating deferred taxes. The engagement team informs the FINOP that they cannot perform the calculation due to SEC independence

  • rules. However, the engagement team

provides to the FINOP a template created by the engagement team. Did the engagement team comply with the SEC independence rules?

37

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Accountant’s Supplemental Report on Material Inadequacies

  • Deficiencies in 43 of the 60 audits
  • Deficiencies related to:
  • Reasonable assurance that any existing material

inadequacies would be disclosed

  • Exemption claimed under Rule 15c3-3
  • Evaluation of reported net capital deficiencies as

indicators of a material inadequacy

  • Evaluation of error in net capital computation as

an indicator of a material inadequacy

  • Timely notification of material inadequacy to

SEC/FINRA

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Risk of Material Misstatement Due to Fraud

  • Deficiencies in 37 of the 60 audits
  • Deficiencies related to:
  • Audit response to identified fraud risks
  • Presumption that revenue recognition is a fraud

risk

  • Journal entry testing

39

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SLIDE 40

Related Party Transactions

  • Deficiencies in 25 of the 60 audits
  • Deficiencies related to
  • No procedures performed
  • Existence and identification of related parties and

related party transactions

  • Examining identified related party transactions
  • Other

40

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Establishing a Basis for Reliance on Records and Reports

  • Deficiencies in 30 of the 60 audits
  • Deficiencies related to:
  • Completeness and accuracy of records and

reports from service organizations

  • Completeness and accuracy of records and

reports produced by brokers and dealers

41

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Evaluation of Internal Control Deficiencies in the Financial Statements

  • Deficiencies in 6 of the 60 audits
  • Deficiencies related to:
  • Assessment of the severity of a control

deficiency

  • Evaluation of errors performed as part of

substantive testing

42

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Auditing Financial Statements

  • Deficiencies in 29 out of 60 audits
  • Deficiencies related to:
  • Omitted disclosures
  • Inaccurate or incomplete disclosures
  • Fair Value disclosures

43

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Understanding the Entity and its Environment when Performing the Audit

  • Deficiencies in 4 out of 60 audits
  • Deficiencies related to:
  • Obtaining an understanding of the entity and its

internal control, in order to design the nature, extent and timing of audit procedures

44

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Auditor’s Report

  • Deficiencies in 21 of the 60 audits:
  • Deficiencies related to:
  • Auditor’s report on supporting schedules
  • Accountant’s supplemental report on material

inadequacies

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Challenges to Anticipate

Client prepared financial statements elongates the audit cycle. Significant increase in the documentation

  • f audit steps

Exemption & Compliance reports

  • Effective June 1, 2014
  • More time, fees increase
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SLIDE 48

Best Practices

Observation 1.Net capital rule Auditor failed to test components of net capital computation Document your procedures

  • Added steps to our audit

program

  • Tickmark FOCUS report
  • Retest haircut

2.Fair Value Insufficient procedures

  • WSJ.com
  • Document price

comparison tested 3.Independence Preparation of financial statements

  • Engage CPA firm to draft

financial statements

  • FINOP
  • QuickBooks report – not

48

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SLIDE 49

49

 PCAOB Disciplinary Process

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50 PCAOB Forum on Auditing Smaller Broker-Dealers November 8, 2012 San Diego, CA

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51 PCAOB Forum on Auditing Smaller Broker-Dealers November 8, 2012 San Diego, CA

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52 PCAOB Forum on Auditing Smaller Broker-Dealers November 8, 2012 San Diego, CA