The Public Company Accounting Oversight Board (PCAOB) issued its annual interim inspection program report on audits of broker-dealers, which broadly discusses 2017 inspection findings with a focus on areas in which firms can improve their performance. The report cited a reduction in the percentage of independence findings from 10 percent (11 out of 115) in 2016 vs. 8 percent (4 out of 48) in 2017, an indication that firms auditing broker-dealers may be doing a better job of complying with independence rules than in past years. One change to keep in mind: in 2017, the selection of independence as a focus area was risk-based, taking into consideration the characteristics of the audit firm, as compared to 2016 when independence was a focus area for all inspections.
As for specifics, inspectors found that independence impairments in 3 of the 4 audits resulted from firms' performance of bookkeeping or other services related to the broker-dealer's accounting records, financial statements, supplemental information, or exemption report. In the other audit, the firm included an indemnification clause in its engagement letter, which stated that the client would indemnify the firm from any and all claims of the broker-dealer and third parties when there was knowing misrepresentation or concealment of information by client management.
Though the following matters did not impair the firms' independence, the report also highlighted that a number of firms were deficient in their application of the requirements to communicate with the client's audit committee about independence. Specifically, inspections staff identified deficiencies related to independence communications to the audit committee (or equivalent) in 14 of 48, or 29 percent, of the applicable audits covered by the inspections, compared to 19 percent of audits with deficiencies identified in 2016, as shown in the table below, a significant jump.
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In 7 audits, the firms failed to make the required annual communications. In 2 audits, the firms failed to make the required communications concerning independence prior to accepting an initial engagement, and in 2 audits, the firms made the required annual communications but incorrectly referenced other regulatory requirements rather than PCAOB Rule 3520, Auditor Independence. The remaining 3 audits were the firms whose independence was impaired because they provided prohibited non-audit services to the broker-dealer or had an indemnification clause in the engagement letter. These firms did not describe those relationships in writing to the audit committees (or equivalent).
According to its 2018 Standard-setting agenda, "Inspection observations have identified situations that raise questions about how firms are executing against the provisions of PCAOB Rule 3526 in circumstances in which there has been a relationship that caused a firm not to be independent under PCAOB Rule 3520. The staff is exploring, through outreach and other research activities, whether guidance should be issued or whether there is a need for amendments to Rule 3526." (Auditor Communications with Audit Committees Concerning Independence)
