In its recently released Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers, the Public Company Accounting Oversight Board (PCAOB) said that it observed "high deficiency rates in examination, review, and audit engagements” when conducting inspections in 2023.
“These high deficiency rates across engagement types are a cause for significant concern,” the report stated.
The PCAOB inspected 60 firms and reviewed 103 broker-dealer audits in 2023, an increase from the 2022 inspection year. It reviewed a total of 92 audits in 2022 and the same number in 2021.
Of its review of 29 examination engagements on broker-dealer compliance reports, the board found that 66 percent had at least one deficiency, compared to 50 percent in 2022. The largest audit firms performed 15 of the examination engagements reviewed in 2023, and deficiencies at these firms increased to 47 percent in 2023 from 32 percent in 2022.
Deficiencies in 14 examination engagements reviewed by other firms increased to 86 percent in 2023 from 73 percent in 2022. Most of the examination engagement deficiencies related to the testing of internal control over compliance.
The PCAOB identified at least one deficiency in 70 percent of the 103 audit engagements on broker-dealer financial reports that it reviewed in 2023, up from 58 percent in 2022. It attributed the increase mainly to two factors. First, there was an increase in the number of inspections performed of firms that hadn'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 percent of audits reviewed during those inspections had at least one deficiency, compared to 89 in 2022. Second, there was an increase in deficient audit engagements at the largest audit firms to 59 percent in 2023 from 33 percent in 2022.
Explaining its inpsections approcach the PCAOB state, “Under the interim inspection program, the PCAOB assesses audit firms’ compliance with applicable laws, rules, and professional standards when performing audit and attestation engagements for broker-dealers. We also evaluate elements of firms’ quality control (QC) systems.”
For its 2023 inspections, the board selected PCAOB-registered firms that performed audits of broker-dealers with financial statement periods ended during the period from April 1, 2022, through March 31, 2023.
Along with descriptions of deficiencies, the report provided some examples of good practices and reminders of certain PCAOB requirements, Accounting Today reported. They focus on topics where deficiencies are persistently high or on the rise, including the following:
● Auditing considerations regarding use of a service auditor's Service Organization Controls (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 released Supplementary
Information Related
to Audits of Brokers
and Dealers, along with the annual report. According to Accounting Today, this supplement includes more information about the audit firms that were selected for inspection, audit and attestation engagements for broker-dealers that were elected by the PCAOB for review, and the inspection results sorted out according to various characteristics.