SEC to Inspect B-D Audits

Terry Flanagan

The Securities and Exchange Commission has given temporary approval to a proposal by the Public Company Accounting Oversight Board to establish a program to inspect the audits of broker-dealers conducted by registered public accounting firms.

“The commission finds that the proposed rule change is consistent with the requirements of the Sarbanes-Oxley Act and the securities laws and is necessary or appropriate in the public interest or for the protection of investors,” said the SEC in an Aug. 18 order.

The move is designed to further strengthen the oversight of broker-dealers handling large amounts of investor assets, and to prevent incidents such as Bernard Madoff’s Ponzi scheme from reoccurring.

“This will mainly affect broker-dealers from cost a perspective,” said Francois Cooke, managing director with ACA Compliance, a compliance firm specializing in broker-dealers. “And the audits that may be conducted may be more rigorous. The key will be Finop compliance. Chief financial officers may need to brace themselves for more rigorous reviews of their financial regulation reporting.”

The rule is a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which amended the Sarbanes-Oxley Act of 2002 to give the board oversight authority regarding the audits of broker-dealers registered with the SEC. The board will publish a report on the interim program and its findings within the next 12 months. Any significant observations may be considered for implementation upon the inception of a permanent inspection program.

“This is an evolving process,” said Cooke. “The PCOB will review these audits and learn and understand what the auditors are doing, and then identify how the inspection will proceed going forward. It’s no different than the first time you examine anyone, you need to find out more about how it’s done before you can prescribe more specific rules.”

However, the side most impacted by the new rule may not be the broker-dealers.

“The major impact is on the audit firms, because it’s the PCOB, which has oversight of the accounting firms, and basically they will be inspecting the broker-dealer audits,” said Cooke. “It may add some costs to the broker-dealer audits, and there are certain processes and controls that must be reviewed by the auditor.”


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