By Amy Leisinger, J.D.
The Public Company Accounting Oversight Board has completed its 2019 inspections of auditors of brokers and dealers and issued its annual report on inspections of audits, providing an overview of results and audit and attestation engagement reviews. While noting a decline in the number of overall deficiencies, the board found a few ongoing problems and recommended steps that auditors can take to improve performance and audit quality.
In its report, the PCAOB notes that audit engagements with deficiencies decreased from 76 percent to 71 percent and that review engagements and examination engagements similarly declined. While finding that firms that audit more than 100 broker-dealers generally have lower percentages of deficiencies compared to other firms, the board states that there are still issues in certain areas of engagement performance. Some firms insufficiently tested important controls, including management review controls, by failing to obtain a sufficient understanding of the nature and extent of management’s review, according to the PCAOB.
The board also found issues surrounding the accuracy and completeness of information produced by either the broker-dealers or their service organizations, as well as information technology controls. Some firms failed to adequately test controls over processes related to compliance with the Customer Protection Rule, the Quarterly Security Count Rule, and the Account Statement Rule, according to the PCAOB. Others also did not test controls important to the auditor’s conclusion about effective internal controls, according to the report. The PCAOB notes that it also continues to "frequently observe" insufficient testing of internal controls over compliance and that developing appropriate testing procedures would lead to further improvements.
In addition, the board highlights the importance of inquiries on all review engagements, as well as documentation of the results. Firms should consider evidence from financial statement audits, including evidence that appears to contradict assertions made in exemption reports, the PCAOB explains. The staff also found that firms did not always obtain a sufficient understanding of the exemption provisions identified by the broker-dealer necessary to properly perform the review engagement or make required inquiries regarding the nature, frequency, and results of monitoring activities. Auditors should evaluate whether information has come to their attention that causes concern as to whether a broker-dealer’s assertions are not fairly stated in all material respects, the board states.
The PCAOB also identifies issues regarding financial statement audits, including classification of fair value of securities, revenue presentation and disclosure, revenue recognition policy disclosures, and statement of cash flows presentation and disclosure.
"The recurring deficiencies described in this annual report highlight potential areas of improvement for all firms, whether or not they were recently inspected," the PCAOB concludes.