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					     PCAOB
      p
     Update



Bob Maday
Division of Registration and Inspections
June 6, 2012
Chicago, IL
    Caveat

    The views I express today are my own and
    do not necessarily reflect the views of the
    Board, individual Board members, or other
    members of the Board’s staff.




2
    Introduction

       Pre-Dodd-Frank
       Dodd-Frank Provisions
                                 p
        The Broker-Dealer Landscape
       Interim Inspection Program
          Scope

          Nature and Focus

          Findings

       Other Significant Developments
       Standards Update
3
    Pre-Dodd-Frank

                     yp
        Sarbanes-Oxley provided that auditors of
        broker-dealers were required to register with
        the PCAOB
       SEC provided an exemption from this
              g        g          ,
        oversight through December, 2008
       Broker-dealers’ financial statements for fiscal
                                       31, 2008,
        years ended after December 31 2008 are
        required to be audited by a PCAOB-
         eg ste ed public accounting
        registered pub c accou t g firm
4
    Dodd-Frank Provisions

       Dodd-Frank expanded the PCAOB’s inspection
        authority to include audits of registered
        securities brokers and dealers.
       Gave PCAOB the authority to:
        G             th    th it t
           Differentiate among different classes of broker-dealers
                                          p
            Consider whether different inspection schedules would be
            appropriate with respect to auditors that issue audit reports
            only for brokers or dealers that do not receive, handle, or hold
            customer securities or cash or are not members of the
            Securities Investor Protection Corporation (section
            104(a)(2)(B))
           Exempt any public accounting firm from such an inspection
            program and the firm would not be required to register with the
            program,
            Board (section 104(a)(2)(D))
5
    Temporary Rule

       SEC order dated August 18, 2011 approved the
        T          Rule f      I t i I       ti
        Temporary R l for an Interim Inspection
        Program for the Audits of Brokers and Dealers

       Allows the PCAOB to inspect audits of brokers
        and dealers

       Provide a source of information to help guide
        decisions about the scope and elements of a
        permanent program


6
    Classification Scheme for Broker-Dealers

                                            SEC
                                         Registered
                                       Broker-Dealers



                 Do Not Claim
                                                               Claim E     ti
                                                               Cl i Exemption
                Exemption From
                                                               From Rule 15c3-3
                  Rule 15c3-3



                          Do Not Report
    Report Customer                                     Introduce to        Do not Introduce
                         Customer Debits
    Debits & Credits                                     other B-Ds          to other B-Ds
                            & Credits



         5%                      2%                         50%                   43%




7
    Broker-Dealers Classified by Auditors
     Issuer
    “Issuer” Inspection Program


                                                         I                     II                                    III                                    IV
                                                   Do Not Claim 15c3-3 Exemption                                 Claim 15c3-3 Exemption
                                                                      Do Not Report                                                                                                   Total
                                                 Report Customer        Customer                    Introduce and do not                       Neither Carry nor                     FINRA
     Audit Firm Categories                       Debits or Credits   Debits or Credits                     Carry                                  Introduce                           B-Ds
     B-Ds that are Audited by Large Firms
        Subsidiary of Issuer                           86                21                                  148                                     111                                   366
        Not a Subsidiary of Issuer                     61                27                                  253                                     228                                   569
                                                      147                48                                  401                                     339                                   935
     B-Ds that are Audited by Small Firms
        Subsidiary of Issuer                             1                3                                   35                                      15                                   54
        Not a Subsidiary of Issuer                      33               15                                  719                                     685                                1,452
                                                        34               18                                  754                                     700                                1,506
     B-Ds Audited by Firms that don't Audit SEC Registered Issuers
        Subsidiary of Issuer                                                                                  2                                        3                                    5
        Not a Subsidiary of Issuer                      31               19                               1,041                                      867                                1,958
                                                        31               19                               1 043
                                                                                                          1,043                                      870                                1 963
                                                                                                                                                                                        1,963

     Unclassified                                        -                 -                                6                                       7                                    13
     B-D Filed an Unaudited Annual Report                -                 -                                 -                                      5                                     5
     Total                                            212                85                             2,204                                   1,921                                 4,422
                                                                         Most recent B-D audit report data Per SEC as of April 1, 2011; FINRA FOCUS Report data as of December 31,2010
                                                                                       Issuer audit report data, with filing dates from December 1, 2010 to July 21, 2011 Per Audit Analytics




8
    Minimum Dollar Net Capital Amounts as
    an Indicator of Business Activity


                                                                 B-Ds that are NOT 15c3-3 Exempt                              B-Ds that are 15c3-3 Exempt
                                                                                           Do Not Report                                                                           Total
                                                               Report Customer               Customer                 Introduce and do not           Neither Carry nor            FINRA
                                                               Debits or Credits          Debits or Credits                  Carry                      Introduce                  B-Ds
    $5,000 (B-Ds that don't receive, hold, owe, carry, etc.)         -                            -                          777                        1,630                       2,407
    $25,000 (B-Ds of only mutual funds, insurance, etc)              -                            -                           25                           89                         114
    $45,000 (CFTC Registered Introducing B-Ds)                       -                            -                           20                           15                           35
    $
    $50,000 (Introducing B-Ds that receive but don't hold)           -                            -                          334                           13                         347
    $100,000 (Dealers or (k)(2)(i) expemt B-Ds)                      -                           11                          632                           81                         724
    $250,000 (Carrying B-Ds and various other B-Ds)                125                           67                          331                           74                         597
    $1,000,000 (Market Makers and CFTC FCMs)                        38                            6                           37                            1                           82
    $ , , (                  )
    $1,500,000 (Prime Brokers)                                      30                            -                            1                            -                           31
    Not Comparable                                                  19                            1                           47                           18                           85
    No Data- Non-FINRA B-Ds                                          -                            -                            -                            -                          -
        Total                                                      212                           85                        2,204                        1,921                        4,422
                                                                                   Most recent audit report data per SEC as of April 1, 2011; FINRA FOCUS Report data as of December 31,2010




9
     Broker-Dealers Classified by Number of
     Business Lines Reported


                                  B-Ds that are NOT 15c3-3 Exempt                 B-Ds that are 15c3-3 Exempt
                                                      Do Not Report                                                             Total
                                Report Customer        Customer              Introduce and do         Neither Carry nor        FINRA
     Inspection Program         Debits or Credits Debits or Credits              not Carry               Introduce              B-Ds
         0 Business lines             -                    -                       -                        1                         1
         1 Business line              6                   7                       69                      459                      541
           Business lines
         2 B i li                     7                  13                       96                      763                      879
         3-5 Business lines          36                  30                      497                      592                    1,155
         6-10 Business lines         78                  21                      954                       98                    1,151
         11-20 Business lines        73                  14                      582                        8                      677
         20-25 Business lines        12                    -                       6                        -                       18
         Total                     212                   85                    2,204                   1,921                     4,422
                                                      Form BD Data as of January 11, 2011; FINRA FOCUS Report Data as of December 31,2010
                                                                                                                                 25,
                                                                Data prepared by SIPC for PCAOB regarding membership as of March 25 2011


10
     Decline in Broker-Dealer Population


                                       SIPC Membership 1998 to 2010

         8,000                                                                                                      1,000
         7,500
         7 500                                                                                                      900
         7,000                                                                                                      800
         6,500                                                                                                      700
                                                                                                                    600
         6,000
                                                                                                                    500
         5,500                                                                                                      400
         5,000
         5 000                                                                                                      300
         4,500                                                                                                      200
         4,000                                                                                                      100
                  1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008    2009     2010
        Total       7,542 7,315 7,033 6,791 6,679 6,466 6,153 5,959 5,654 5,435 5,208 4,956 4,773
        Added        721   638   644   616   632   471   444   347   298   234   227   186   214
        T     i t d
        Terminated 753     865   926   858   744   684   757   541   603   453   454   438   397




                                                                                  Source: SIPC Annual Reports 1998 to 2010




11
     Broker-Dealers Subject to Liquidation or Direct
     Payment Procedures Under SIP Act Commenced After
     1/1/95 and Paid as of 12/31/10



                                                                                                      SIPC Customer
                                                                                                       Advances in                % of
                                                        Number of B-D               % of               Liquidations             Customer
                                                         Liquidations           Liquidations            (Millions $)            Advances
     B-Ds that Claim Exemption to 15c3-3                          65                  84%                      97                  10%
     B-Ds that do not Claim Exemption (Except Madoff)             11                  14%                      75                   8%
     Madoff Liquidation (in process)                               1                   1%                     755                  81%
     T ota l                                                     77                  100%                    927                 100%
     Data Source: Information prepared by SIPC for PCAOB as of December 31, 2010 and most recent FOCUS data. Table by ORA B-D Desk




                   g        ,              q
            Excluding Madoff, 86% of SIPC liquidations and 56% of customer
            advances were for B-Ds that claim exemption from Rule 15c3-3
           The average customer advances paid for B-Ds that claim exemption was
            $1.6 million
                                                   B-Ds
            The average customer advances paid for B Ds that do not claim exemption
            was $7.4 million (excluding Madoff)

12
     Scope of the
     Interim Inspection Program

        Temporary Rule
            Does not differentiate between any classes of
             brokers and dealers
            Does not exempt any category of public accounting
             firm
                          what any
         Judgments about what, if any, differentiation
         and exemptions appropriate for a permanent
         program to be informed by observations during
         course of Interim Inspection Program


13
     Scope of the
     Interim Inspection Program
        Scope in the Temporary Rule not to be
              t d      likely         f
         construed as lik l scope of a permanent   t
         program or suggest every broker or dealer
         auditor will be inspected as part of the interim
         program
        Board expects to be able to gather information
         necessary without having to inspect most firms
         during the interim program
        Focus on assessing compliance with applicable
              d dC                  l     d     f
         Board and Commission rules and professional    l
         standards


14
     Nature and Focus of
     Interim Inspection Program

        At this time, the standards that apply to audits
         of brokers and dealers have not changed from
         what they were before the Dodd-Frank
         amendments
        SEC has provided transitional guidance stating
         that references to GAAS should continue
        Consideration will be given to current audit
         guidance




15
     Interim Inspection Program Findings

        Annual report on significant observations
         obtained during the inspections
        Do not plan to issue firm-specific inspection
               t
         reports
        Identify and address with the inspected firm
         any significant issues in its audit work
        Where appropriate, information about potential
         violations by brokers or dealers would be
         referred to the SEC and other authorities
           y                   g              p    y
         May lead to an investigation or disciplinary
         proceedings regarding the conduct of the firm
16
     Interim Inspections - Observations

     Audit of the Financial Statements

        Tests of Revenue and Receivables
        F i V l Measurements
         Fair Value M            t
        Related Party Transactions
        Consideration of Fraud
        Establishing a Basis of Reliance
        Evaluating Errors and Control Deficiencies
        Financial Statement Disclosures
        Independence
17
     Interim Inspections - Observations

     Tests of Net Capital

        Allowable and Non-Allowable Assets
        Aggregate Indebtedness
        Haircuts
            l             f
         Early Warning Notification




18
     Interim Inspections - Observations

     Accountant’s Supplemental Report on
     Material Inadequacies

        Accounting System
        Internal Controls
            Capital,
         Net Capital Aggregate Indebtedness
        Customer Reserve, Possession or Control
                    T,
         Regulation T Quarterly Counts
        Rule 15c3-3 Exemption


19
     Other Significant Developments

        SEC proposed amendments to Rule 17a-5
        PCAOB proposed new standards and/or
         amendments to current standards related to the
           dit f broker-dealers
         audits of b k d l
        PCAOB to issue guidance related to the
         implementation of new or changed standards
        PCAOB to amend rules to include audits of
         broker-dealers
         broker dealers



20
     Standards Related to Audits of Broker-
     Dealers
                                Financial Statements and
                                                                              Compliance
                                       Schedules

     Required currently     •   Auditing standards generally      •   Auditing standards generally
     under existing Rule        accepted in the US*                   accepted in the US*
     17a-5                  •   Applicable SEC rules, including   •   Applicable SEC rules, including
                                SEC independence rules                SEC independence rules

     Required under         •   PCAOB auditing and professional   •   PCAOB auditing and professional
     proposed amendments        practice standards,** including       practice standards,** including
     to Rule 17a-5                •   Proposed standard on              •   Proposed examination
                                      auditing supplemental                 standard or review
                                      information                           standard
                            •   Applicable SEC rules, including   •   Applicable SEC rules, including
                                SEC independence rules                SEC independence rules




     *    SEC Release No. 34-62991, Commission Guidance Regarding Auditing, Attestation, and
                               Practice (Oct. 1
          Related Professional Practice. (Oct 1, 2010)
     **   This includes applicable PCAOB auditing, attestation, quality control, and ethics and
          independence standards, and related PCAOB rules
21
     Standards of the PCAOB
        Interim Standards
            Auditing, attestation,       control,
             Auditing attestation quality control ethics and independence
             standards and related rules
            Adopted by the Board in April 2003; standards remain in effect
             until superseded or become permanent
        PCAOB Issued Standards, Rules, and Guidance
            Auditing standards No. 1 – 15, including audit documentation,
             ICFR, EQR, and risk assessment
            PCAOB rules related to standards
                 Rule 3101 – certain terms used in auditing and related
                  professional practice standards
                 Rules 3501 to 3526 – ethics and independence
            Staff questions and answers
            Staff audit practice alerts No. 1 – 9
                                                                   No.
             Staff guidance for auditors of smaller companies on AS No 5

22
     Standard-setting Agenda

        Near-term standard-setting projects
            Auditor’s Reporting Model
            Auditor Independence
            Audit Transparency
            Broker-Dealer Audit and Attestation Standards and Staff
             Guidance
            Communications with Audit Committees
            Part of Audit Performed by Other Auditors (Principal Auditor)
            Assignment and Documentation of Firm Supervisory
             Responsibilities (Failure to Supervise)
            Fair Value Measurements of Financial Instruments
            Related Parties


23
     Summary

        Authority provided by Dodd-Frank
        Interim inspection program
        Information to assist the Board
        Audit quality
        Rules and Standards Changes
        Determination of a permanent inspection
         program for firms that audit broker-dealers




24
     Questions?




25

				
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