U.S. auditors may face more stringent regulatory oversight, following the release of the Public Company Accounting Oversight Board’s first report on the progress of the interim inspection program for the auditors of U.S. brokers and dealers.

The report provides an overview of the new program, as well as the major deficiencies identified in the initial group of inspected audits.

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Over a five-month period, from October 2011 to February 2012, the PCAOB reviewed ten audit firms, and covered portions of twenty-three audits of brokers and dealers registered with the Securities and Exchange Commission.

“While the results of these initial inspections cannot be generalized to all securities audits, the nature and extent of the findings are of great concern,” says James R. Doty, PCAOB chairman.

They recorded deficiencies in the following areas:

  • Audit procedures related to the computations of customer reserve and net capital requirements;
  • Audits of financial statements; and
  • Auditor independence

“All registered firms issuing audit reports for SEC-registered brokers and dealers should consider whether the audit deficiencies described in this report might be present in their own inspections. They should take appropriate action to prevent or correct any such faults identified,” says Doty.

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Financial Times reports the board was given the green light to scrutinize audits of U.S. broker-dealers under the Dodd-Frank financial reform. It says the group hopes “to close some of the loopholes fraudsters like Madoff take advantage of to operate Ponzi schemes [and scams]”.

Three of the ten firms inspected were already subject to PCAOB inspection, while the rest were newly subject to inspection under the interim inspection program.

During the interim inspection program, the board expects to review approximately 100 audit firms covering portions of more than 170 audits of brokers and dealers through 2013. The program is designed to cover a cross-section of audits of SEC-registered brokers and dealers.

The program was implemented in 2011, in response to new oversight authority given to the board.

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The program has two purposes: it enables the board to assess the compliance of registered firms and their auditors, and it will help it establish the scope and elements of the permanent inspection program.

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