Tuesday, November 01, 2011

PCAOB Member Goelzer Sets Out Guiding Principles for Oversight of Broker-Dealer Audits, Foresees Exemptions for Some Brokers

According to PCAOB Member Dan Goelzer, the Board’s new broker-dealer auditor inspection regime will be guided by the principles of investor protection, diversity among brokers, and a balancing of costs against benefits. In remarks at a recent broker-dealer auditing forum hosted by the Board, he expressed his belief that the Board will ultimately conclude that the auditors of some significant categories of broker-dealers can safely be exempted from PCAOB oversight without compromising investor protection.

But, those decisions, when they are made, will be based, not on speculation but on empirical information the PCAOB will gather over the next several years. Armed with information from its interim inspection program, continued Member Goelzer, the Board will be in a position to determine the objectives, nature, and frequency of inspections for different classes of brokerage firms; to decide on possible exemptions from oversight; and to defend those decisions if they are questioned.
Everything the Board does to implement the new Dodd-Frank conferred authority over broker-dealer audits, emphasized Member Goelzer, will be measured against the yardstick of what is in the best interests of investors. This principle comports with the purpose of the Board’s very creation to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports for public companies and now, said the Member, also for securities broker-dealers.

The second principle recognizes that the Board’s broker-dealer auditor oversight program must reflect the diversity of the broker-dealer population and the wide differences in risk profiles. While there are a handful of mega firms, noted Mr. Goelzer, most broker-dealers are very small, with only 32 firms having net capital in excess of $1 billion. But those 32 firms hold over 75 percent of the net capital in the entire broker-dealer industry. At the other end of the spectrum, over 70 percent of all broker-dealers have net capital under $1 million.

As to activities, he continued, the pattern is similar. Only about 300 registered brokerage firms maintain custody of their client's securities and cash. Many of the other roughly 4,500 broker-dealers that file audited annual reports do not, at least in theory, have access to customer funds or securities. Some are insurance agents that sell products that are technically securities; some are finders active in the M&A market; while others are captives serving the trading needs of a single, affiliated client.

Other categories of firms whose activities have only an indirect effect on the investing public exist as well. In the view of Member Goelzer, this diversity raises questions about whether and how, on a long-term basis, the Board should devote resources to inspecting the auditors of all of these categories of brokers and dealers.

In activation of the third principle, the Board, before pouring the concrete around a permanent regulatory program, intends to make sure it is as fully educated as possible about costs and benefits.

Congress has made the decision that investor protection requires that broker-dealer auditors should be under Board oversight, posited Member Goelzer, but the Board has considerable latitude to decide on frequency of inspection and exemptions and exclusions. He said that the new program will benefit from some of the lessons learned over the past nine years in building and refining a risk-based public company auditor oversight program, adding that the Board will also coordinate closely with the SEC and FINRA and draw on their expertise and long experience.

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