Broker, Auditor Independence Remains “Troubling”

Broker/dealers and their auditors continue to cross the independence line despite years of education and numerous warnings, according to regulators. That leaves many industry watchers at a loss on how to change the ongoing problem.

“We have been talking about the independence requirements [for broker/dealers] for almost three years, and it’s been part of Rule 17a-5 for 30 years,” said Barbara Vanich, associate chief auditor for the Public Company Accounting Oversight Board. “It’s troubling that even yesterday we fielded independence questions for 45 minutes [from brokers and auditors] about what they can and cannot do.”

Accounting and Wall Street compliance professionals discussed the issue at the recent SIFMA/AICPA National Securities Industry Conference in New York.

In a report released in August that focused on broker/dealers registered with the U.S. Securities and Exchange Commission, the PCAOB said it identified audit deficiencies or independence findings in 56 of the 60 audit firms inspected, and in 71 of the 90 audits inspected in 2013. Since the start of the review in 2011, the PCAOB said independence findings were identified in 45 of the 173 audits selected for inspection, or  26 percent.

“We’ve found a significant number of independence violations, primarily auditors preparing the books or by generating entries that clients use to close the books,” said Robert Maday, deputy director of the PCAOB’s Division of Registration and Inspections at the meeting. “I can tell you it continues and we continue to see it. We are trying to get the message out and and trying to get to the auditors to understand the SEC rules regarding what is not allowed in the involvement in bookkeeping or preparation of the financial statements.”

A key issue for the broker/dealer industry is the number of firms  that are being audited by small shops with either little public company experience or knowledge of the broker/dealer industry.

The PCAOB’s August report found 89 percent of the audits with independence issues came from the firms that did not audit public companies. Additionally, inspection “observations” were identified in 100 percent of audits selected for inspection for auditors with only one broker/dealer audit client, 92 percent for firms that audited two to 100 broker/dealers and 63 percent for firms that audited more than 100 broker/dealers.

Vanich added that the rules around auditor independence are essentially built on whether a relationship or service that the auditors provides creates a “mutual or conflict of interest.”

For example, she said, warning signs should be raised if the relationship places the auditor in the position of auditing his or her own work, the relationship results in the auditors acting an employer or management of an audit client, or if it places the auditors in the position of advocate for the client.

Maday said that while the PCAOB does not have jurisdiction over broker/dealers, it does have the ability to move against auditors. “Our interactions are with the firms that are registered with us,” he said. “But broker/dealers could have a deficient finding on their audits if the issues are not addressed.”