Annual broker dealer audits and consistent reporting show that broker dealers are compliant with regulations established to protect investors. Broker dealers should implement their own internal investigations to prove their commitment to investors, but tax and audit services are the primary external tool to verify their practices.
Preparing for Broker Dealer Audits
The key to preparing for a broker dealer audit is to keep accurate documentation per your auditor’s requirements. If your auditor doesn’t provide a request list in advance, use lists from prior auditors or ask your current auditor to provide one.
If this is your first broker deal audit, prepare to be asked for accounting information such as accounts receivables and payables, expenses, company logs, and others. Your auditor can advise you on the additional documents to have available. You can use this information to conduct routine internal inspections and make future audits a smoother process.
Common Findings in Broker Dealer Audits
Broker dealer audits often reveal common deficiencies, such as internal audits being performed by the company’s accounting department.
Other common broker dealer deficiencies include:
- Insufficient auditing of revenue recognition
- Insufficient evaluation of financial statement disclosures
- Insufficient auditing of receivables and payables
- Insufficient consideration of an entity’s going concern
- Insufficient compliance with exemption provisions
The Objectives of Broker Dealer Audits
Annual broker dealer audits must be conducted by accounting firms registered with the Public Company Accounting Oversight Board. The auditor cannot be from the same firm that provides accounting services, and cannot be tied to the broker dealer beyond providing broker dealer audits. Only an independent auditor can verify that the broker dealer is complying with regulations and properly serving their clients.
Best Preparation Practices for Broker Dealer Audits
Broker dealers should maintain regular internal checks and audits. Employees should be trained to identify and isolate problems. A self-checking system will help broker dealers meet external audit requirements, and speed up the process to verify the integrity of their accounting practices. An accounting firm can perform these checks, but only if a different one performs the broker dealer audits.
The overall goal of broker dealer audits is to examine the broker dealer’s compliance with SEC and PCAOB regulations. These audits aren’t intended to examine employee practices or performance. For that, broker dealers should review internal audits, which can help external audits go smoothly.