Small Brokers Fight Auditing Proposal
December 14, 2009
Small brokerage firms are taking their fight against having their accountants subject to regulation by the Public Company Accounting Oversight Board to the Senate.
The focus on the Senate comes after a compromise in the House of Representatives last week, first reported by Securities Industry News, that would give the Board the authority to decide whether auditors of small brokers need to register with them, rather than leaving the issue up to lawmakers.
Like the original House proposal, the Senate plan-part of Banking Committee Chairman Christopher Dodd's financial regulatory package-seeks to broaden the regulatory scope of the public accounting board so that auditors of all broker-dealers would be required to register with and be subject to inspection by the Board.
Smaller broker-dealers say the proposed law would hike audit costs for independent broker/dealers so much that some firms would go out of business. Instead, "an amendment is needed to redirect the attention of the PCAOB auditors to the custodial broker-dealers where scams like [Bernard] Madoff's are more likely to be uncovered," an industry source said last week.
The PCAOB is a private-sector nonprofit corporation created by the Sarbanes-Oxley Act of 2002, to oversee the auditors of public companies to make sure they have adequate systems in place to prepare and deliver fair and informative financial reports to investors.
The National Association of Independent Broker Dealers (NAIBD) has been raising awareness of the issue by focusing on the nuts-and-bolts impact of the proposal on small broker-dealers. Stephen Distante, chief executive of Vanderbilt Securities and chairman of NAIBD, told Securities Industry News that the issue centers on heavy PCAOB requirements for auditors of public companies.
For an auditor to become PCAOB-approved, the firm must complete an application and pay a fee. The Board then inspects the accounting firm, which must prepare in a way that can require internal system changes and operational shifts, says Susan Coffee, senior vice president at the American Institute of Certified Public Accountants (AICPA).
For example, quality control documentation is required on policies and procedures, compliance with rules and regulations, and independence, among other things. The PCAOB's oversight of Sarbanes-Oxley requirements and accounting standards focuses on making sure, among other things, that adequate controls are place to make sure that financial assets accumulated in balance sheets and other reports actually exist; that verifiable documentation is maintained; and that adequate tests of those controls have been performed.
There are also operational impacts relating to how employees must be deployed, as staff members are moved from other tasks to monitor and control the procedures used to collect and report financial data. This hikes personnel costs.
The result, according to Coffee, is that broker-dealers can be hit with a double whammy: The PCAOB charges the broker-dealers fees to cover the inspections, and accountants also charge more for the audit, passing along their own costs associated with the inspections.
An Expensive Audit
If these requirements are extended to auditors of all broker-dealers, "That becomes a very expensive audit," Distante says. "My audit fee now is $8,000. I would be looking at between $50,000 and $100,000 if this is put in place. If the provision passes, small firms may have to determine whether they want to be in business any longer" (see box).
