Broker-dealer audits continue to have high deficiency rates

The PCAOB issued its annual report Thursday on its audits of brokers and dealers and is seeing at least one deficiency in 70% of the 103 audit engagements it reviewed in 2023.

“Overall, in 2023 we observed high deficiency rates in examination, review and audit engagements,” said the report. “These high deficiency rates across engagement types are a cause for significant concern.”

Last year, as part of an interim inspection program, it inspected 60 firms and reviewed 103 broker-dealer audits, an increase from the 2022 inspection year. The inspections included review of 34 broker-dealer audits conducted by four largest firms that audited more than 100 broker-dealers and more than 100 issuers in the 2021, 2022, and 2023 inspection periods. 

In the PCAOB’s review of 29 examination engagements on broker-dealer compliance reports, the board found that 66% had at least one deficiency compared to 50% in 2022. The largest audit firms performed 15 of the examination engagements reviewed in 2023, and deficiencies at these firms increased to 47% in 2023 from 32% in 2022. 

The remaining audit firms performed the other 14 examination engagements reviewed by the PCAOB, and deficiencies at these firms increased to 86% in 2023 from 73% in 2022. Most of the examination engagement deficiencies related to the testing of internal control over compliance.

The PCAOB said it identified at least one deficiency in 70% of the 103 audit engagements on broker-dealer financial reports it reviewed last year, up from 58% in 2022. The increase was mainly attributable to two factors, including an increase in the number of inspections performed of firms that haven’t been previously inspected. Those kinds of inspections typically result in high deficiency rates throughout the history of the interim inspection program. In 2023, the PCAOB inspected 18 firms that hadn’t previously been inspected, compared to nine in 2022. In 2023, the report noted, 90% of audits reviewed during those inspections had at least one deficiency, compared to 89% in 2022. The second factor was an increase in deficient audit engagements at the largest audit firms to 59% in 2023 from 33% in 2022.

Along with descriptions of deficiencies, the report gives firms some examples of good practices and reminders of certain PCAOB requirements. The good practices and reminders focus on topics where deficiencies are persistently high or on the rise, including the following:

Along with descriptions of deficiencies, the report gives firms some examples of good practices and reminders of certain PCAOB requirements. The good practices and reminders focus on topics where deficiencies are persistently high or on the increase, including the following:

• Auditing considerations regarding use of a service auditor’s SOC 1 report to obtain evidence of the design and operating effectiveness of certain controls at a service organization;
• Testing relevant assertions for investment advisory fee revenue;
• Enhancing procedures for examining journal entries and other adjustments for evidence of possible material misstatement due to fraud; and
• Enhancing focus on required communications to the broker-dealer’s audit committee (or equivalent) and management.

The PCAOB also issued a separate supplementary publication related to audits of brokers and dealers, along with the annual report. It includes more information about the audit firms selected for inspection, audit and attestation engagements for broker-dealers selected by the PCAOB for review, and the inspection results stratified according to various characteristics.