Temporary Rules to Inspect Audits of Brokers, Dealers Under Dodd-Frank Provision

Jack Humphrey, Regulatory journalist
June 24, 2011 /

The Public Company Accounting Oversight Board (PCAOB) has adopted temporary rules to inspect the public accounting firms’ audits of brokers and dealers under the Dodd-Frank Act.

The interim rules establishing inspection program for the audits of brokers and dealers came simultaneously with PCAOB’s adoption of rules for assessing and collecting a portion of its accounting support fee from brokers and dealers to fund its oversight of audits of brokers and dealers, in compliance with the Dodd-Frank Act.

Funds to cover the PCAOB annual budget, less registration and annual fees paid by registered public accounting firms, would be collected from issuers as provided for by Section 109 of the Sarbanes-Oxley Act. The collection would be based on each issuer’s relative average monthly equity market capitalization.

But now PCAOB is required to allocate respective portions of its total accounting support fee among issuers and brokers and dealers after amendments were made to Section 109, which additionally allows for differentiation among classes of brokers and dealers.

In a statement, PCAOB Chairman James Doty, said: “The interim inspection program will allow the Board to gain a better understanding of how PCAOB can provide meaningful investor protection, consistent with our intent to avoid imposing unnecessary burdens on smaller auditors and broker-dealers.

“And I believe the amendments to the Board’s funding rules provide an efficient mechanism to fund the PCAOB’s oversight without imposing unwarranted costs and administrative burdens on smaller brokers and dealers,” Doty added.

Under the Dodd-Frank Act, PCAOB is tasked to address questions concerning the scope of the program and the frequency of inspections, including whether to differentiate among categories of brokers and dealers and whether to exclude from the inspection program any categories of auditors.

Under the interim rules, PCAOB will identify and address any significant issues in the audits of brokers and dealers.

Insights from the interim rules are expected to inform the eventual determination of the scope and elements of a permanent program. PCAOB said it “expects to propose rules governing the scope and elements of a permanent program in 2013.”

Although PCAOB will regularly report on the progress of the program, it will not issue firm-specific inspection reports before inspection work is performed under the permanent program and will not issue firm-specific inspection reports on any firms that are eventually excluded from the scope of the permanent program.

PCAOB emphasized that the interim rules do not alter the standards governing the audits of brokers and dealers. The SEC previously said its rules continue to require those audits to be carried out under generally accepted auditing standards (GAAS).

On the other hand, the amended funding rules would result in brokers and dealers with more than $5 million in tentative net capital being allocated an appropriate portion of the accounting support fee.

Depending on the approval of the SEC, the rules will be in effect for its 2011 funding cycle for broker and dealers, which begins in the fall.

The amendments to the funding rules were based on PCAOB’s experience with the accounting support fee process for issuers since 2003, which increase the market capitalization threshold for equity issuers from $25 million to $75 million and investment company issuers from $250 million to $500 million and revise the basis for calculating an issuer’s market capitalization to include the market capitalization of all classes of an issuers’ voting and non-voting common equity rather than just its common stock.


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