Section 982 of the Dodd-Frank Act amends Section 104(a) of the Sarbanes-Oxley Act of 2002 (SOX) to authorize the PCAOB to adopt rules for inspections of audit reports of brokers and dealers. Specifically, the PCAOB may conduct and require a program of inspection of registered public accounting firms that provide one or more audit reports for a broker or dealer. The PCAOB may differentiate among classes of brokers and dealers. The PCAOB must consider whether different inspection schedules should apply to registered public accounting firms that issue audit reports only for one or more brokers or dealers that do not receive, handle, or hold customer securities or cash, or are not members of the Securities Investor Protection Corporation (SIPC). Notwithstanding SOX Section 102, a public accounting firm cannot be required to register with the PCAOB if it is exempt from the inspection program which the Board may establish.
Rules adopted by the PCAOB for broker-dealer audits must be approved by the Securities and Exchange Commission (SEC). In addition, Section 982 would bring audits of broker-dealers within the PCAOB's authority to set auditing and independence standards, and the Board's investigatory and disciplinary power. Broker-dealers also would be subject to an allocation of the accounting support fee.
The Office of Chief Auditor's briefing paper notes that a "broker-dealer" is an individual or firm that conducts a business of trading securities for itself or for customers. Broker-dealers must register with the SEC, and most broker-dealers are members of the SIPC. Applicable SEC regulations, include but are not limited to, rules governing net capital (Rule 15c3-1), customer protection and related topics (Rule 15c3-3), and reports made by brokers and dealers (Rule 17a-5). Introducing broker-dealers, who do not handle customer assets, are not required to comply with Rule 15c3-3. The legislative history of the Dodd-Frank Act sheds some additional light on the briefing paper's observation regarding introducing brokers.
The Senate Committee Report notes that the PCAOB Chairman sent a letter to the Chairman and Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs recommending that the Board be given authority to review audits of broker-dealers. The committee report also stated that the SIPC supported extending the PCAOB's oversight to audits of all broker-dealers. (S Rep. No. 111-176, p. 154) The Minority View contained in the committee report suggested that the burden of the PCAOB's new authorities could be reduced if Section 982 of the Dodd-Frank Act is not applied to introducing brokers. (S Rep. No. 111-176, p. 246)
In light of the pending Dodd-Frank Act, the briefing paper posed two discussion questions for the SAG meeting: Because of existing SEC requirements, would the PCAOB need to establish specific auditing, attestation or professional practice standards for broker-dealer audits, and if so, what would they be? What other matters would the PCAOB need to consider in developing standards for the audits of broker-dealers?