What are PCAOB Standards in Broker Dealer Auditing?

Companies that provide broker dealer audit services must follow several standards to ensure they maintain precise bookkeeping data for clients. If you run a broker business that wants to undergo a thorough audit, the company that you hire to perform the audit should follow the standards created by the Public Company Accounting Oversight Board (PCAOB). At Ernst Wintter & Associates, our company follows every audit standard mandated by the PCAOB.

The PCAOB rose from the ashes of the historic financial meltdown that unfolded in late 2007, which forced lawmakers at both the state and federal levels to make reforms. Although the collapse of the housing market precipitated the financial meltdown, brokers also felt the impact of the monumental changes imposed by legislative bodies from Albany, New York, to Washington, D.C. The Consumer Protection Act and the Dodd-Frank Wall Street Reform Act granted the PCAOB considerably more power to oversee the audits conducted for broker dealers registered with the United States Securities and Exchange Commission (SEC).

What PCAOB Standards Must Broker Dealers Follow for Audits

When the reforms in the United States financial system began to take place right after the financial meltdown of 2007-08, lawmakers first tackled fundamental issues such as the frequency of audits. Before the SEC stepped in to apply tougher auditing standards, companies did not have to follow a schedule for receiving regular audits. To meet the auditing standards set by the SEC and enforced by the PCAOB, businesses should receive an audit one time a year to ensure full compliance.

When broker dealers file reports with the SEC, federal law requires them to include the appropriate financial statements that support every section of an audit. The reports filed must come from an independent accounting firm that has registered with the PCAOB. Broker dealers receive broker dealer audit services to file compliance and exemption reports that are prepared by the same independent accounting firm that completed the comprehensive audit report. The Dodd-Frank Wall Street Reform Act gives the PCAOB the legal power to create an inspection program for independent accountants to follow when auditing broker dealers.

Another important PCAOB standard that broker dealers must follow concerns the examination requirements for each statement. Broker dealers must present sufficient evidence that is based on empirical data to meet the examination standard established for each accounting statement. Compliance with examination standards should come from the empirical data collected over the most recent year. Broker dealers must consider the risk of fraud, which includes the misuse of consumer financial assets. Each examination standard followed by broker dealers should be based on the size and type of organization undergoing an audit.

Broker dealers that plan to request exemptions to certain audit standards must turn to the PCAOB to ensure they meet the legal standards that allow for the submission of exemptions. The PCAOB has created specific rules for claiming exemptions to prevent broker dealers from omitting critical financial information. According to rule 17a-5 created by the PCAOB, certified independent accountants must acquire at least moderate assurance from broker dealers that the broker dealers meet the exemption standards defined by the PCAOB.

What Can Broker Dealers Expect in the Future

Nearly 20 years have passed since the monumental legal changes for auditing standards swept over the broker dealer industry. Are there more legal changes on the horizon for the companies that conduct broker dealer audits? If history is our guide, it will take another seismic financial meltdown for the SEC to impose additional regulatory standards.