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Broker-Dealer Audit Alert: How New Rule 17a-5 Amendments Will Affect Your Audit

During 2013, the SEC released amendments to Rule 17a-5.  The changes will impact audits of broker-dealers (“BDs”) with fiscal years ending on or after June 1, 2014.  Below are important changes that will affect this year’s audit:

#1 – Audits of all BDs must be performed in accordance with the standards of the Public Company Accounting Oversight Board (“PCAOB”).  Historically, BD audits were performed under generally accepted auditing standards (“GAAS”) established by the American Institute of Certified Public Accountants (“AIPCA”). 

#2 – Amended reporting requirements eliminate the Report of Independent Auditors on Internal Control (commonly known as the “material inadequacies letter”) for all BDs as previously required by Rule 17a-5(g)(1). 

#3 – BDs who claim exemption from Rule 15c3-3 throughout the year will be required to file an Exemption Report with the filing of its annual Financial Report. BDs must engage their PCAOB registered independent public accounting firm to perform a review of its Exemption Report.  The PCAOB released Attestation Standard 2 (“AT 2”) - Review Engagements Regarding Exemption Reports of Brokers and Dealers under which this review must be performed.  The Report must contain the following:

  • A statement that identifies the provisions in paragraph (k) of Rule 15c3-3 under which the BD is claiming an exemption;
  • A statement that the BD has met the identified exemption provisions in paragraph (k) of Rule 15c3-3 throughout the most recent fiscal year.  The BD must state that they met the requirement or that it met the identified exemption provisions in paragraph (k) of Rule 15c3-3; and
  • If applicable, a statement that identifies each exception that was incurred during the year, including a brief description of the exception and the approximate date(s) on which the exception existed.

#4 – BDs who do not claim exemption from Rule 15c3-3 throughout the year will be required to file an annual Compliance Report in conjunction with the filing of its Financial Report.  These BDs must engage their PCAOB registered independent public accountant to perform an examination over certain statements contained in its Compliance Report.  The PCAOB released Attestation Standard 1 (“AT 1”) - Examination Engagements Regarding Compliance Reports of Brokers and Dealers under which this review must be performed. The Compliance Report will contain the following five statements made by the BD with respect to specific Financial Responsibility Rules (i.e., Rule 15c3-1, Rule 15c3-3, Rule 17a-13 and the Account Statement Rule), as defined in Rule 17a-5:

  • The BD has established and maintained internal control over compliance;
  • The internal control over compliance of the BD was effective during the most recent fiscal year;
  • The internal control over compliance of the BD was effective as of the end of the most recent fiscal year;
  • The BD was in compliance with Rule 15c3-1 and paragraph (e) of Rule 15c3-3 as of the end of the most recent fiscal year; and
  • The information the BD used to state whether it was in compliance with Rule 15c3-1 and paragraph (e) of Rule 15c3-3 was derived from the books and records of the BD.  

#5 – As stated in the FAQ issued by the SEC, the independent public accountant’s report based on an examination of the Compliance Report will satisfy the internal control report requirement under Rule 206(4)-2 of the Investment Advisers Act of 1940 (“Custody Rule”) for broker-dealers that are required to obtain an internal control report under the Custody Rule. There can be no gaps in the periods covered by a previously issued internal control report and the examination report.     

#6 – Due to the amendments of paragraph (f)(2) of Rule 17a-5, broker-dealers must file a new statement regarding its independent public accountant as required under Rule 17a-5(f)(2).  For a broker-dealer with a 2014 fiscal year end between June and December 2014, the new statement must be filed on or before the 10th day of the month in which the BD’s fiscal year ends. This is true for the fiscal year audit ending in 2014, even if the independent accountant is not new. The form requires your audit firm’s state registration number which you will need to obtain from your audit firm.

#7 – Incremental to annual independence communications, PCAOB standards require that certain independence matters be communicated to the audit committee (or those charged with overseeing the accounting and financial reporting process, if no audit committee is established), when an audit is to be performed under PCAOB standards for the first time.  Your audit firm should be sending you a communication that covers specific matters required to be communicated. These matters are required to also be discussed with a representative of those charged with overseeing the accounting and financial reporting process before we are engaged.    

An Alert providing guidance to auditors of broker-dealers regarding these new requirements was released in late May by the Center for Audit Quality (“CAQ”) and the AICPAs.  

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