Audit deficiencies for broker-dealers increase for third straight year

Over the past year and a half, the PCAOB’s gotten tougher with audit firms, levying record fines and decrying an increase in deficiencies.

The results of a recent inspection report won’t give it much reason to soften its stance.

Deficiencies in audits of broker-dealers increased for the third straight year in 2023, the PCAOB found. Of the 103 audits of broker-dealer financial reports it examined, 70% had deficiencies, up from 58% in 2022 and 49% in 2021.

Deficiency rates were high across all categories of broker-dealer engagements, not just audits, something the PCAOB described as “cause for significant concern.” The agency found deficiencies in two-thirds of compliance report examination engagements, and 40% of reviews of exemption reports.

More than half of the deficiencies the PCAOB identified (56%) were due to auditors’ using insufficient or inappropriate evidence to support their audit opinions, up from 50% in 2022. Fourteen percent were attributed to noncompliance with laws and regulations, versus 8% in 2022.

Deficiency rates increased at both larger and smaller companies. Audits by the largest firms—those that audited more than 100 broker-dealers and more than 100 issuers in the years 2021–23—had deficiencies 59% of the time, up from 33% in 2022. Those by smaller firms had an alarming 75% deficiency rate, up from 71% in 2022.

The PCAOB recommended certain best practices auditors should follow related to the largest categories of deficiencies it found. It suggested that auditors review third parties’ SOC 1 reports to learn about the design and effectiveness of their controls, and test assertions around investment advisory fee revenue. It also recommended that auditors improve their procedures for reviewing journal entries for evidence of possible fraud, and that they strengthen their communications with broker-dealers’ audit committees and management.