In a comment letter, the Center for Audit Quality (CAQ) asked the PCAOB to clarify the Board’s proposed temporary rule for an interim program of inspection related to audits of brokers and dealers. CAQ also encouraged the Board to focus a significant portion of its efforts on audits of brokers and dealers of greater significance to investors. For example, brokers and dealers that have possession and control of customer securities, or act as clearing or custodial brokers, are typically considered to be of greater significance to investors and other users than introducing brokers that accept customers’ orders for processing.
Section 982 of the Dodd-Frank Act expanded the PCAOB’s inspection authority to include audits of securities brokers and dealers. The Board has proposed a temporary rule to establish an interim inspection program designed to allow the Board to begin inspection work on audits of broker and dealers without waiting. This will also help the Board in making fully informed judgments about the scope of a permanent program.
While fully supporting the Board’s intent to inform its decisions in determining a permanent inspection program, CAQ asked for clarity on how the interim inspection program will be executed. For example, given that there is no description or clear understanding of what constitutes the ``classes’’ of brokers and dealers as used throughout the release and the proposed temporary rule, CAQ recommended that the Board specifically define what is meant by “classes” of brokers and dealers.
In addition, the proposal indicates that one of the purposes of the interim inspection program is to assess the degree of compliance of accounting firms with SEC and PCAOB rules in connection with the performance of audits and related matters involving brokers and dealers. CAQ asked the Board to clarify what it means by “related matters” so that audit firms can fully understand the Board’s expectations.
Similarly, CAQ encourages the Board to elaborate on its expectations related to the voluntary cooperation of certain firms under the interim inspection program prior to the proposed temporary rules taking effect. The Board said that even before the rule takes effect it expects to be able to conduct relevant procedures with the voluntary cooperation of certain firms. The Board should clarify what it means by “relevant procedures” during the voluntary period.
For example, does the Board anticipate that inspection procedures performed during the voluntary period will include actual inspection of audits of brokers and dealers or be limited to scoping procedures. In addition, CAQ urged the Board to elaborate on the timing of such procedures and indicate which firms are expected to voluntarily cooperate.
Noting inconsistencies between the release language and the proposed temporary rule regarding firm-specific inspection reports, CAQ seeks clarification regarding the process by which the Board will report inspection deficiencies in such reports. Specifically, during the course of the interim inspection program it is not sufficiently clear how inspection findings will be communicated to the firm, what response opportunities the firm will have, or the timing and extent to which interim inspection findings will be communicated in firm-specific reports.
Further, it is not clear if the findings will be communicated orally or in writing and what opportunities the firm will have to respond to such findings. It is also unclear whether the Board intends to issue the public portion of a firm-specific report before the permanent rule takes effect and, if so, what opportunities the firm will have to respond to a draft inspection report before it is made public. Moreover, it is not clear what interim inspection observations the Board intends to include in the initial firm-specific reports released after a permanent program takes effect.
CAQ commended the Board on its plan to at least every 12 months publish reports on the interim inspection program’s progress and significant observations that either may bear on the Board’s consideration of a permanent program or otherwise may be appropriate to protect investors. CAQ believe that such transparent reports will be helpful not only in informing the public as to the Board’s progress but also in improving audit quality. These reports will clarify the Board’s expectations for effective audits of brokers and dealers as well as focus audit firms on improving their work in areas where common deficiencies, if any, are identified.
As the Board contemplates the structure of these reports, CAQ encourages the PCAOB to consider reporting its observations by different types of brokers and dealers whose audits were inspected during the interim inspection program. Including this level of detail in the Board’s progress reports will help investors in understand how the Board ultimately determines the scope of the permanent inspection program.
In addition, CAQ believes that this information will be helpful to the registered public accounting firms that perform such audits by enhancing their level of understanding of the Board’s expectations and observations with regard to engagements related to the different types of brokers and dealers. CAQ understands that the level of detail will have to be balanced with making certain that the accounting firm and the broker-dealer are not identified or could potentially be identified, but believes that such balance could be achieved.