PCAOB names common broker-dealer audit deficiencies

The Public Company Accounting Oversight Board posted a staff report on testing transactions between broker-dealers and related parties.

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According to PCAOB standard AS 2410, Related Parties, an auditor’s objective is to obtain evidence to determine whether a broker-dealer’s relevant relationships and transactions have been properly identified, accounted for and disclosed in financial statements. In its latest staff publication, “Broker-Dealer Audit Focus: Related Party Transactions,” the PCAOB identified common deficiencies:

• Not testing the allocation of revenues and expenses between a broker-dealer and its parent or affiliates;
• Not evaluating whether allocated revenues or expenses are consistent within the terms of the agreements;
• Not evaluating the financial capability of a broker-dealer’s parent or affiliates to satisfy a material uncollected balance owed to the broker-dealer;
• Not identifying omitted or inaccurate disclosures in the broker-dealer’s financial statements necessary to understanding the effects of transactions between a broker-dealer and its parent or affiliates; and,
• Not communicating to the audit committee the auditor’s evaluation of the broker-dealer’s identification of, accounting for and disclosure of transactions with its parents or affiliates.

The board reminded auditors they should perform procedures to identify and assess risks of material misstatement associated with the broker-dealer’s relevant relationships and transactions. Auditors must also design and perform procedures that address the risks of material misstatement. Finally, auditors must evaluate the accounting for and disclosure of the broker-dealer’s relevant relationships and transactions and should communicate their assessment to the audit committee or its equivalent. 

The PCAOB provided good practices for those who audit broker-dealers:

• Use a practice aid with guidance to assist engagement teams; 
• Use checklists to identify the required financial statement disclosures and communications for the audit committee; and,
• Train audit teams on AS2410 and FASB ASC Topic 850, as well as industry-specific requirements.