Posts

ACI Participates in Effort to Overturn PCAOB Inspection over Non-Custodial Broker Dealer Audits

ACI’s Managing Partner, Jay Gettenberg, was in Washington D.C. this week for the 2018 FINRA Annual Conference. His recent involvement in the FINRA District 10 Committee, which commenced on January 1, 2018, offered Mr. Gettenberg the opportunity to assist Paige Pierce, chair of the FINRA Small Firm Advisory Board, and Robert Hackel, Chief Operating Officer of R.F. Lafferty & Co., Inc., in an effort to reduce regulation and potentially clear the path for the removal of the PCAOB’s oversight of certain qualifying broker dealer audits.   On Wednesday, May 23, 2018, Ms. Pierce, Mr. Hackel and Mr. Gettenberg were able to secure a meeting at Congress to push forward this agenda.

The proposed bill, which hopes to make it to the Congressional floor in early June, would still require broker dealers to obtain annual independent certified audits, but the PCAOB oversight and scrutiny would no longer apply for non-custodial/carrying broker dealers, provided they employ less than 150 registered representatives. This would qualify them under FINRA’s guidelines as a “small firm.”

Over the past few years, the broker dealer community has seen a significant increase in audit costs, which primarily correlates with enhanced peer review requirements, auditor fear of PCAOB inspection and sanctions, and the overall reduction in PCAOB certified audit firms, who were unable to keep current with evolving and increasingly complex standards.

Efforts made over the past few months by a small group of industry experts has resulted in the SEC and PCAOB verbally committing to remaining neutral on any proposal submitted for ratification. While they are not supporting the passing of legislation that would mitigate the requirement, they are also not opposing it, leaving the decision to the House of Representatives and the Senate to decide the fate of the bill.  At this time, the Senate has obtained both a Republican and Democratic co-sponsor and the House has obtained a Republican sponsor.  The recent efforts of Ms. Paige, Mr. Hackel, Mr. Gettenberg, and a few other leading industry professionals, has propelled the likelihood of obtaining a Democratic co-sponsor in the House, which would allow the bill to be eligible for vote, potentially leading to approval and implementation over the upcoming months.

It is currently estimated that the removal of PCAOB inspection over small broker dealer audits would result in over $60 million in annual savings for the approximately 3,000 member-firms that would qualify. The goal is to provide imminent relief to the small broker dealer community, which has significantly decreased in size over the past half-decade.

The Impact of PCAOB and How ACI Can Help Reduce Audit Fees

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 designated the Public Company Accounting Oversight Board as the regulatory agency responsible for overseeing the audits of all broker dealers registered with the Securities and Exchange Commission. Over the past 7 years, the PCAOB has performed extensive reviews of audit files, scrutinizing independence, documentation procedures and the general effort put forth by the audit community to ensure the reports issued present an accurate, complete and fair representation of the financial position of each member firm.

In instances where the PCAOB has determined that the auditors failed to properly fulfill their responsibilities, fines have been levied and suspensions have been invoked against the audit firms. The severity of failing to establish and execute a near perfect audit program has created a perpetual fear that has pervaded the audit community and has resulted in many small audit firms opting to delist themselves from performing broker dealer audits.  For those audit firms who remain actively engaged, the level of due diligence to certify an audit, and the time commitment to ensure they are protected from the PCAOB, has resulted in significant fee increases within the industry.

For certain broker dealers, possession of customer funds and their obligation to the investing public, may legitimatize the scrutiny of PCAOB, as the overall objective of this legislation was to restore trust in the financial services sector. For the vast majority of broker dealers, who do not hold customer funds or often do not do business with the general public, the increased scrutiny and increased costs have resulted in undue hardship for minimal substantiated value.

While ACI does not have any ability to mitigate the audit requirement for our broker dealer clients, we have spent a considerable amount of time and effort to assist with alleviating the obligations of the broker dealer during this annual process. Our recent effort to convert the fiscal year end away from December 31st has been very successful.  Auditors are generally less busy during the off-calendar year-end, which has often resulted in broker dealers receiving a higher quality audit at a lower cost.  We have actively communicated with our contacts at FINRA and have repeatedly been successful in facilitating our goal of ensuring our broker dealer clients comply with their regulatory requirements in the most time efficient and cost effective manner possible.

If you would like to learn more about how ACI can help your firm with this process, please contact Jay Gettenberg at (212) 668-8700, extension 25 or email us at info@acisecure.com.