Post-Madoff audits of concern to US accounting watchdog
PCAOB shows concern after its first interim inspection of US auditors' work at broker-dealers
THE QUALITY OF AUDIT WORK designed to help prevent another Madoff Ponzi scheme is of concern to US regulators.
US accounting watchdog the PCAOB has released its first report on the quality of auditors’ work on brokers and dealers. The report was introduced by the Securities and Exchange Commission (SEC) as part of its response to the Ponzi scheme fraud to which Bernie Madoff admitted four years ago.
In the report, carried out between October 2011 and February 2012, inspectors reviewed ten audit firms covering portions of 23 audits of brokers and dealers registered with the SEC. Issues were found in all 23 audits checked by inspectors.
The report, “Report on the Progress of the Interim Inspection Program Related to Audits of Brokers and Dealers”, stated deficiencies were found in audit procedures related to computations of customer reserve and net capital requirements, audits of financial statements, and auditor independence.
“In 13 of 23 audits checked by PCAOB, audit firms didn’t ensure risks of material misstatements due to fraud were assessed and responded to,” the board said.
James Doty (pictured), chairman at PCAOB, said: “While the results of these initial inspections cannot be generalised to all securities broker and dealer audits and represent only a small portion of the inspections planned for the Interim Program, the nature and extent of the findings are of concern to the board.”
The board expects to review approximately 100 audit firms, covering portions of more than 170 audits of brokers and dealers, through 2013. The inspection is designed to cover a cross-section of audits of SEC-registered brokers and dealers.
As part of the SEC’s programme to try to prevent a repetition of the Madoff fraud, it introduced an enhanced audit regime for brokers and dealers. Broker-dealers maintaining custody of customer securities and cash were required to undergo a compliance examination by a PCAOB registered public accounting firm. This also involved an audit of the controls the broker-dealer has in place to protect customer assets.
Of the PCAOB’s inspection of the auditors, three of the ten firms reviewed were already inspected by the watchdog because they audit public companies. However, seven were new to the process.