Annual Report on the
Interim Inspection
Program Related to Audits
of Brokers and Dealers
PCAOB Release No. 2020-001
August 20, 2020
Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers | 1
PCAOB Release No. 2020-001 August 20, 2020
Executive Summary
The Public Company Accounting Oversight Board (PCAOB) has completed its 2019 inspections of auditors of brokers
and dealers. This Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers provides a
summary of inspection results as well as information auditors can use to improve audit quality.
There were 411 public accounting rms (rms) registered with the PCAOB that performed audits of broker-dealers
registered with the U.S. Securities and Exchange Commission (SEC) this inspection period, and we selected 66 of
these rms for inspection. Our inspections assess rms’ compliance with professional standards and applicable rules
and regulations, with a focus on risks to customers of broker-dealers.
While our 2019 inspections revealed modest improvement in the rate of deciencies, we continue to see a high rate of
deciencies in certain areas of engagement performance. We also continue to see that rms that audit more than 100
broker-dealers generally have lower percentages of deciencies compared to other rms.
We have observed similar deciencies despite limited changes to auditing and attestation standards other than
those involving related parties and the auditor’s report. The recurring deciencies described in this annual report
highlight potential areas of improvement for all rms, whether or not they were recently inspected. While some have
demonstrated progress, other rms have not taken suicient steps to address audit and attestation engagement
performance. We expect rms to take meaningful actions to address these recurring deciencies.
All rms need to evaluate how they can improve their system of quality control. A strong system of quality control
can serve to prevent engagement deciencies from occurring. Firms should take what was learned from these
66 rm inspections, including the examples of eective procedures, and consider how to proactively implement
improvements, rather than reacting as a result of a PCAOB inspection.
Auditors of brokers and dealers should focus their eorts on improving their system of quality control and their
engagement performance in all areas described in this annual report, but particularly in these areas where we
continue to observe frequent deciencies:
y Examination Engagements – We frequently observe insuicient testing of the design and operating eectiveness
of internal controls over compliance. We believe that focusing on the risks associated with a control will help
rms develop appropriate testing procedures and lead to further improvement in this area. In 2019, examination
engagements with deciencies decreased to 69% from 75%.
y Review Engagements – Inquiries are required on all review engagements, and rms should document the
results of inquiries made. Firms should also take into account evidence from nancial statement audits, including
evidence that appears to contradict assertions made in exemption reports, when planning, performing, and
evaluating the results of review engagements. In 2019, review engagements with deciencies decreased to 51%
from 54%.
y Financial Statement Audits – Revenue and nancial statement presentation and disclosure are commonly
reviewed areas during an inspection. We believe that obtaining a suicient understanding of internal control over
nancial reporting, and other risk assessment procedures, will help rms clearly identify and assess the risks of
material misstatement in these areas, and prevent deciencies from occurring in these areas of the audit. We
encourage rms to consider the details of our observations in these areas as they conduct broker-dealer audits. In
2019, nancial statement audits with deciencies decreased to 71% from 76%.
The information contained in this annual report may be helpful for other stakeholders, including management and
the audit committee (or equivalent body) of the broker-dealers, when engaging with the rms regarding audit quality
and broker-dealer nancial reporting.
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PCAOB Release No. 2020-001 August 20, 2020
For Additional Information
The PCAOB website includes additional information and
resources for auditors of broker-dealers, including previous
annual reports, information about outreach forums, periodic
Spotlight publications, and more. To receive periodic
updates from the PCAOB, please join our mailing list.
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66
Firms
Inspected
y 7 With No Deficiencies
106
Audit
Engagements
y 31 With No Audit Deficiencies
y 53 With Audit and Attestation
Deficiencies
y 22 With Audit Deficiencies but
No Attestation Deficiencies
29
Examination
Engagements
y 9 With No Deficiencies
74
Review
Engagements
y 36 With No Deficiencies
Inspections By the Numbers
2019
67
Firms
Inspected
y 3 With No Deficiencies
105
Audit
Engagements
y 25 With No Audit Deficiencies
y 55 With Audit and Attestation
Deficiencies
y 25 With Audit Deficiencies but
No Attestation Deficiencies
24
Examination
Engagements
y 6 With No Deficiencies
79
Review
Engagements
y 36 With No Deficiencies
2018
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PCAOB Release No. 2020-001 August 20, 2020
Contents
Executive Summary .................................................................................................................1
Overview ...................................................................................................................................4
Inspection Observations .......................................................................................................... 5
Attestation and Audit Engagements ..........................................................................................................6
Examination Engagements ........................................................................................................................................................ 6
Review Engagements .................................................................................................................................................................. 9
Auditing Financial Statements ................................................................................................................................................11
Auditing Supplemental Information Accompanying Audited Financial Statements ...................................................17
Other Instances of Non-Compliance with PCAOB Standards .................................................................19
Auditor’s Report on the Financial Statements and Supporting Schedules ....................................................................19
Auditor Communications .........................................................................................................................................................20
Engagement Documentation ..................................................................................................................................................20
Quality Control ..........................................................................................................................................21
Engagement Performance .......................................................................................................................................................21
Monitoring ...................................................................................................................................................................................22
Independence, Integrity, and Objectivity .............................................................................................................................. 22
Personnel Management ............................................................................................................................................................22
Auditor Independence ..............................................................................................................................22
PCAOB Standards Associated with Inspection Observations ..............................................24
Appendix A: Selection of Firms and Engagements for Inspections ................................... A-1
Appendix B: Comparative Results from Our Inspections under the Interim Program ..... B-1
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PCAOB Release No. 2020-001 August 20, 2020
Overview
The PCAOB has registration, inspection, standard-setting, and disciplinary authority over the auditors of brokers and
dealers registered with the SEC.
This Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers provides information
on the inspections, an overview of the results of our inspections and related audit and attestation engagement
reviews, and information on steps auditors can take to improve their performance. Hereinaer, the use of the term
"broker-dealer" refers to entities that are registered with the SEC as both a broker and a dealer and to entities that are
registered as only one or the other.
Overseeing the audits of SEC-registered broker-dealers is a key component of the PCAOB’s mission to protect investors
and further the public interest in the preparation of informative, accurate, and independent audit reports. This report
serves to advance our strategic goal to drive improvement in the quality of audit services through a combination of
prevention, detection, deterrence, and remediation.
We noted that deciencies are lower in 2019 than 2018 for each type of engagement.
y Audit engagements with deciencies decreased to 71% from 76%.
y Review engagements with deciencies decreased to 51% from 54%.
y Examination engagements with deciencies decreased to 69% from 75%.
The percentages of deciencies varied by audit area reviewed. Some decreased in 2019 compared to 2018, while
others increased.
2019 Inspections Approach
Under the interim inspection program, the PCAOB assessed rms’ compliance with applicable laws, rules, and
professional standards when performing audit and attestation engagements for broker-dealers. We also evaluated
elements of rms’ systems of quality control. In 2019, we inspected 66 rms and reviewed 106 audits.
1
We reviewed
103 related attestation engagements, including 29 examination engagements and 74 review engagements.
In selecting rms to inspect and engagements for review, we primarily use risk-based selections, and consider various
characteristics of the rms and broker-dealers. Our selections also include randomly selected rms and engagements
to provide an element of unpredictability. We do not review every aspect of an audit or attestation engagement.
Rather, we generally focus our attention on areas we believe to be of greater complexity and areas of greater
signicance or with a heightened risk of material misstatement to the broker-dealer’s nancial statements.
Our selection of rms for inspection and engagements for review does not constitute representative samples of the
population of rms that audit broker-dealers or engagements. Additionally, our inspection ndings are specic to
the particular portions of the engagements reviewed. They are not an assessment of all work performed by the rms
selected for inspection or all of the procedures performed for the engagements reviewed.
Further, the populations of rms and broker-dealers are not homogeneous. Therefore, the observations related to
quality control, attestation and audit deciencies, other instances of noncompliance with PCAOB standards, and
independence ndings are not necessarily representative of the population of all rms that perform broker-dealer
audits or of all broker-dealer audit and attestation engagements.
1
The 2019 inspection of one rm and review of one audit conducted by that rm occurred in January 2020.
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PCAOB Release No. 2020-001 August 20, 2020
The deciencies we identied do not necessarily mean that the broker-dealer’s nancial statements, supporting
schedules, or compliance or exemption reports are not fairly presented or stated, in all material respects. It is oen not
possible for us to reach a conclusion on those points based on our inspection because we have only the information
in the broker-dealer’s lings and the information the auditor retained. We do not have direct access to the broker-
dealer’s management, underlying books and records, and other information.
Broker-Dealer Annual Reporting Pursuant to SEC Rule 17a-5
This graphic depicts certain broker-dealer annual reporting requirements and related auditor responsibilities. Further
discussion of the requirements and inspection observations appear elsewhere in this report.
Broker-Dealer claims
exemption from the Customer
Protection Rule
Broker-Dealer prepares
an Exemption Report
Independent public
accountant prepares a
Review Report
Broker-Dealer does not claim
exemption from the Customer
Protection Rule
Broker-Dealer prepares
a Compliance Report
Independent public
accountant prepares an
Examination Report
Broker-Dealer
prepares the nancial
statements and the
required supplemental
schedules
Independent public
accountant performs an audit
of the nancial statements
and required supplemental
schedules
This graphic is being provided as an example; it is not intended to, and does not, cover all instances where a broker-
dealer may be eligible to le an exemption report. Certain broker-dealers do not claim exemption from the Customer
Protection Rule (a broker-dealer nancial responsibility rule
2
), because they do not meet the exemption conditions of
paragraph (k) of that rule, and instead, prepare an exemption report pursuant to SEC and SEC sta guidance.
Inspection Observations
Inspections of selected rms under the interim inspection program included review of selected engagements and
evaluation of elements of the rms’ systems of quality control. Inspections sta communicated the following, as
applicable, to each inspected rm:
y Observations related to its system of quality control;
y Deciencies in its audits of broker-dealer nancial statements and supporting schedules, and its examination and
review attestation engagements;
2
For purposes of this Annual Report, the term “nancial responsibility rules” refers to the Securities Exchange Act of 1934 (“Exchange Act”) Rule
15c3-1, Net Capital Requirements for Brokers or Dealers (the “Net Capital Rule”); Exchange Act Rule 15c3-3, Customer Protection – Reserves and
Custody of Securities (the “Customer Protection Rule”); Exchange Act Rule 17a-13, Quarterly Security Counts to be Made by Certain Exchange
Members, Brokers and Dealers (“Quarterly Security Count Rule”); and any rule of a designated examining authority that required the broker-
dealer to send account statements to customers (“Account Statement Rule”). Paragraph (e) of the Customer Protection Rule is referred to as
the “Reserve Requirements Rule.”
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PCAOB Release No. 2020-001 August 20, 2020
Throughout this report, we highlight eective procedures that describe brief scenarios and possible
procedures that may be eective to address that scenario. These eective procedures are provided as
examples and do not modify or establish auditing or attestation standards. Auditors should consider
the specic facts and circumstances of their engagements when designing audit procedures.
Attestation and Audit Engagements
This section of our report discusses certain observations from our inspections related to attestation and audit
engagements when rms did not perform—or did not suiciently perform—certain required procedures, or otherwise
comply with the applicable standards.
As further described in Appendix B, we have reclassied certain deciencies from 2018 inspections reported in the
previous Annual Report to conform to the classication of deciencies from 2019 inspections.
Examination Engagements
The auditor must plan and perform an examination of statements made by the broker-dealer in its compliance report
in accordance with AT No. 1. The examination includes obtaining evidence about whether one or more material
weaknesses existed in the broker-dealer’s internal control over compliance (ICOC) with the broker-dealer nancial
responsibility rules during, and as of the end of, the broker-dealer’s most recent scal year. The examination also
includes performing tests of the broker-dealer’s compliance with the Net Capital Rule and the Reserve Requirements
Rule as of the end of the broker-dealer’s scal year.
Deciencies in Examination Engagements
In a few instances in this report, we summarize—solely for the purpose of providing basic context
to readers—rules and standards (or aspects thereof) that, while not promulgated by the PCAOB,
are relevant to our inspection activities. Readers should not rely on our summaries as authoritative;
instead, they should refer directly to those rules and standards, along with any associated
authoritative interpretive materials.
2019 2018
Number of
Applicable
Engagements
Reviewed
Number of
Engagements with
Deciencies
Percentage Percentage
Examination Engagements 29 20 69% 75%
y Other instances of non-compliance with PCAOB standards; and
y Independence ndings.
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PCAOB Release No. 2020-001 August 20, 2020
The following deciencies were identied in the examination engagements:
Planning for the Examination Engagement
Firms did not obtain a suicient understanding of broker-dealer processes, including relevant controls, regarding
compliance with the nancial responsibility rules. (AT No. 1.09)
Testing of ICOC
Firms did not perform, or suiciently perform, testing of ICOC for one or more nancial responsibility rules. (AT No.
1.11)
Firms did not test, or suiciently test, important controls, in particular the following specic types of controls:
y Management review controls, in particular not obtaining a suicient understanding of the nature and extent of
management’s review, including understanding and evaluating the expectations and criteria used by management
to identify matters for investigation, as well as the nature and resolution of the investigation procedures performed;
y Controls over the accuracy and completeness of information produced by either the broker-dealer or the broker-
dealer’s service organizations upon which the design and operating eectiveness of ICOC depended; and
y Information technology controls or automated application controls.
Firms did not test controls that were important to the auditor’s conclusion about whether the broker-dealer
maintained eective ICOC as of its scal year-end.
ICOC: Management Review Controls
The auditor considered management’s review of its monthly net capital computation an
important control and one that the auditor was required to test. The auditor inquired of the
control owner regarding the nature of the review, information used, expectations, thresholds
for variances requiring investigation, and resolution of variances. In addition, the auditor inquired about the
nature of errors in applying the Net Capital Rule identied through the review during the year. The auditor
selected a sample of monthly net capital computations and inspected evidence of management’s review,
including evidence that variances exceeding the threshold were resolved. The auditor determined that the
control owner used a securities borrowed and loaned report to determine the appropriate net capital charge,
and that the control owner also veried that amounts from the report were accurately captured and included in
the computation. The auditor separately tested controls over the accuracy and completeness of the information
included in the securities borrowed and loaned report.
Firms did not test, or suiciently test, important controls over processes related to compliance with the Customer
Protection Rule, including:
y Determining credit and debit balances reported within the reserve computations pursuant to Exhibit A of the
Customer Protection Rule;
y Making timely deposits to special reserve bank accounts;
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PCAOB Release No. 2020-001 August 20, 2020
y Identifying and resolving decits that required action by the broker-dealer within the required timeframe; and
y Maintaining custodial accounts free of any right, charge, security interest, lien, or claim.
Firms did not test, or suiciently test, important controls over processes related to compliance with the Quarterly
Security Count Rule, including:
y Accounting for all securities subject to the broker-dealer's control or direction, but not in its physical possession,
and verifying all such securities in that status for more than 30 days; and
y Assigning appropriate broker-dealer personnel to make or supervise the quarterly security counts.
Firms did not test, or suiciently test, important controls over processes related to compliance with the Account
Statement Rule, including producing and delivering complete and accurate account statements, either electronically
or by mail, to all customers.
ICOC: Account Statement Rule
All of a broker-dealer’s customers elect to access their customer account statement in
electronic form and decline receipt of a paper statement. A broker-dealer relied on an internally
developed application to create account statements that included securities positions, money
balances, and account activity as required by the Account Statement Rule. The auditor tested controls over
the production of the statements and controls over the accuracy and completeness of information included in
the statements. The controls tested included automated application controls, manual controls, and relevant
information technology controls. The auditor also tested controls related to electronic delivery of statements.
Account Statement Rule
Financial Industry Regulatory Authority (FINRA) Rule 2231 replaced NASD Rule 2340, Customer
Account Statements, eective May 8, 2019. FINRA Rule 2231 requires each general securities
member to send account statements to customers at least once each calendar quarter containing
a description of any securities positions, money balances, or account activity in the accounts since the prior
account statements were sent, except if carried on a Delivery versus Payment/Receive versus Payment basis and
certain requirements are met.
Performing Compliance Tests
Firms did not perform, or suiciently perform, tests of compliance with the Net Capital Rule or the Reserve
Requirements Rule as of the end of the broker-dealer’s scal year, including : (AT No. 1.21)
y Evaluating whether the amounts reported within the schedules were determined in accordance with the
applicable rules;
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PCAOB Release No. 2020-001 August 20, 2020
y Testing the accuracy and completeness of the information in the schedules, including information produced by
the broker-dealer (or the broker-dealer’s service organizations) that was used by the broker-dealer to prepare its
schedules; and
y Determining whether the broker-dealer maintained a special reserve bank account for the exclusive benet of its
customers or for broker-dealers in accordance with the Reserve Requirements Rule.
Performing Compliance Tests
A broker-dealer used an internal system to allocate securities positions according to the
broker-dealer’s identied allocation pairings for determining balances in its customer reserve
computation. As part of the audit of the nancial statements, the auditor performed valuation,
conrmation, and securities position reconciliation procedures to determine whether the broker-dealer’s scal
year-end stock record was complete and accurate. As part of its compliance tests over the customer reserve,
the auditor selected a sample of securities from the stock record and re-performed the allocation to determine
whether the broker-dealer allocated the securities in accordance with its identied allocation pairings. The
auditor also reviewed the broker-dealer’s allocation pairings hierarchy and compared it to the requirements of
Exhibit A of the Customer Protection Rule.
Evaluating Results of the Examination Procedures
Firms did not suiciently evaluate results of examination procedures to determine whether individually, or in
combination with other deciencies, one or more material weaknesses in ICOC existed. (AT No. 1.25 and .26)
Obtaining a Representation Letter
Firms did not obtain written representations from management of the broker-dealer. (AT No. 1.32)
Reporting on the Examination Engagement
In examination reports, rms included statements that referred to a required assertion that broker-dealers did not
include in their compliance reports. (AT No. 1.36)
Review Engagements
In accordance with AT No. 2, the auditor must plan and perform the review of assertions made by the broker-dealer in
its exemption report. The objective of the review includes obtaining evidence about whether one or more conditions
exist that would cause one or more of the broker-dealer’s assertions not to be fairly stated, in all material respects.
The auditor should coordinate the review engagement with the audit of the nancial statements and supplemental
information, taking into account relevant evidence obtained in the audit when planning, performing, and evaluating
the results of the review engagement.
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PCAOB Release No. 2020-001 August 20, 2020
Deciencies in Review Engagements
The following deciencies were identied in the review engagements:
Performing the Review Engagement
Firms did not obtain a suicient understanding of the exemption
provisions identied by the broker-dealer and other rules and
regulations relevant to the broker-dealer’s assertions in its exemption
report, which was necessary to properly perform the review
engagement. (AT No. 2.05)
Firms did not make required inquiries, including inquiries about
controls in place to maintain compliance with the exemption
provisions, and those involving the nature, frequency, and results of
related monitoring activities. (AT No. 2.10)
2019 2018
Number of
Applicable
Engagements
Reviewed
Number of
Engagements with
Deciencies
Percentage Percentage
Review Engagements 74 38 51% 54%
Firms did not perform, or suiciently perform, an evaluation of
evidence obtained in the audit of the nancial statements that
contradicted the broker-dealer’s assertions regarding compliance
with the claimed exemption provision. (AT No. 2.10)
Inquiries of Management
Auditors should make the inquiries required by
AT No. 2 to identify exceptions to the exemption
provisions. The auditor inquired of the broker-
dealer’s Finance and Operations Principal
(FINOP) and the Chief Compliance Oicer regarding ndings
the broker-dealer received in a regulatory examination report
from its designated examining authority. The ndings indicated
the broker-dealer’s written supervisory procedures related
to prompt transmittal of customer funds were decient. The
auditor inquired of the FINOP regarding how those deciencies
were taken into account when preparing the statement in the
broker-dealer’s exemption report that identies each exception
to the identied exemption provision. The auditor also inspected
documentation that corroborated the FINOP’s response.
Sta Guidance
Regarding
Coordination of the
Audit and Review
Engagements
Examples of financial statement
audit procedures that may provide
information relevant to the broker-
dealer’s compliance with the
exemption provision(s) from the
Customer Protection Rule identified
in the broker-dealer’s exemption
report include:
y Testing customer trades;
y Testing of specially designated
cash accounts;
y Testing investment inventory
or transactions related to the
broker-dealer’s trading for its own
account; and
y Reading the clearing agreement
in connection with testing trade
fee or commission revenue or
expenses.
Source: Sta Guidance for Auditors of SEC-
Registered Brokers and Dealers (June 2014)
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PCAOB Release No. 2020-001 August 20, 2020
Firms did not suiciently evaluate results of review procedures, because they did not evaluate information that should
have caused them to believe that one or more of the broker-dealer’s assertions regarding the claimed exemption
provision were not fairly stated, in all material respects. (AT No. 2.11)
Firms did not obtain written representations from management of the broker-dealer. (AT No. 2.13)
Reporting on the Review Engagement
In review reports, rms included statements that referred to a required assertion that broker-dealers did not include in
their exemption reports, or referred to dierent exemption provisions than as specied in related exemption reports.
(AT No. 2.16)
Auditing Financial Statements
The nancial statements broker-dealers include in their annual lings with the SEC are required to be audited in
accordance with PCAOB standards. Our standards require auditors to obtain suicient appropriate audit evidence to
support the opinion expressed in the auditor’s report (i.e., as to whether the nancial statements present fairly, in all
material respects, the nancial position, results of operations, and cash ows in conformity with GAAP).
Evaluating the Results of the Review Procedures
The auditor should evaluate whether information has come to the auditor’s attention that
causes the auditor to believe that one or more of the broker-dealer’s assertions are not fairly
stated, in all material respects. A broker-dealer stated in its exemption report that it complied
with the exemption provisions of paragraph (k)(2)(ii) of the Customer Protection Rule throughout the year
without exception. During its audit of the broker-dealer’s nancial statements, the auditor obtained information
that the broker-dealer did not have an arrangement with a clearing broker-dealer at any point during the year,
and that the broker-dealer’s revenue was earned primarily from private placements. The auditor took into
account this evidence from the audit of the nancial statements and modied its review report to indicate the
broker-dealer’s assertion regarding the exemption claimed was not fairly stated in all material respects because
it did not reect the nature of the broker-dealer’s private placement services.
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PCAOB Release No. 2020-001 August 20, 2020
Areas of the Financial Statement Audit with Deciencies
Audit Areas
2019 2018
Number of
Applicable
Engagements
Reviewed
Number of
Engagements with
Deciencies
Percentage Percentage
Revenue 97 51 53% 60%
Financial Statement
Presentation and Disclosures
106 39 37% 27%
Identifying and Assessing Risks
of Material Misstatement
106 16 15% 23%
Related Party Relationships and
Transactions
37 10 27% 55%
Receivables and Payables 26 7 27% 21%
Consideration of an Entity's
Ability to Continue as a Going
Concern
9 6 67% 40%
Consideration of Materiality in
Planning and Performing an
Audit
106 4 4% 3%
Post-Audit Matters 7 3 43% 0%
Risks of Material Misstatement
Due To Fraud
8 3 38% 12%
The following deciencies were identied in the audits of nancial statements:
Revenue
Firms used information produced by the broker-dealer as audit evidence, but did not suiciently test the accuracy and
completeness of that information, whether by testing controls, testing the information, or a combination of both. (AS
1105.10)
Firms did not perform audit procedures to address the assessed risks of material misstatement for one or more
relevant assertions. (AS 2301.08)
Firms did not perform tests of details specically responsive to the assessed risks of fraud related to improper revenue
recognition. (AS 2301.13)
Firms did not perform suicient tests of controls, including information technology controls and automated
application controls, to support control risk assessments at less than the maximum when the nature, timing, and
extent of substantive procedures were based on that lower assessment. (AS 2301.16)
Firms did not perform suicient substantive procedures for relevant assertions. (AS 2301.36)
Firms did not obtain suicient evidence about the eectiveness of controls at the broker-dealers’ service organizations
to support the assessed level of control risk at less than the maximum and the related modication of the nature,
timing, and extent of substantive procedures. (AS 2601.14 and .15)
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PCAOB Release No. 2020-001 August 20, 2020
Responses to Significant Risks, Including Fraud Risks
For signicant risks, auditors should perform substantive procedures, including tests of details,
that are specically responsive to the assessed risks. A broker-dealer advises clients on mergers
and acquisitions and is compensated through a combination of retainer and success fees. The
auditor identied a fraud risk related to the occurrence of success fees for private transactions. The auditor
selected recorded success fees from private transactions throughout the year and subsequent to year-end. In
addition to vouching cash receipts and requesting conrmation of related receivables, the auditor requested
conrmation of key transaction terms, including closing date, from the broker-dealer’s customers. The auditor
also inspected closing documents to corroborate the information obtained through the conrmation process.
FASB ASC Topic 606
FASB ASC Topic 606, Revenue from Contracts with Customers, became eective for annual periods
beginning aer December 15, 2017. FASB ASC Topic 606 replaced most industry-specic revenue
recognition guidance, including broker-dealer guidance, with a ve-step model. Under the
model, an entity should:
1. Identify the contract(s) with a customer;
2. Identify the performance obligations in the contract;
3. Determine the transaction price;
4. Allocate the transaction price to the performance obligations in the contract; and
5. Recognize revenue when (or as) each performance obligation is satised.
When using substantive analytical procedures, rms did not establish that there were plausible and predictable
relationships between the data, develop expectations that were suiciently precise to identify misstatements,
determine the amount of dierence from expectations that could be accepted without further explanation, or
evaluate the reliability of the data from which their expectations were developed. (AS 2305.11 and .20)
When testing a sample, rms did not plan and design an appropriate sample, did not select sample items in such a
way that the sample could be expected to be representative of the population, and did not project the results of the
sample to the items from which the sample was selected. (AS 2315.16, .21, .24, and .26)
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PCAOB Release No. 2020-001 August 20, 2020
Revenue Recognition
Auditors should perform procedures to address the risks of material misstatement related to
improper revenue recognition. A broker-dealer advises clients on mergers and acquisitions.
The broker-dealer’s contracts with its customers are nonstandard but generally include success
fees and compensation for other services. The broker-dealer asserted that its contracts contain multiple
performance obligations. The auditor tested management's assertion by inspecting a sample of contracts, and
assessing the nature of the promises based on the contract terms. The auditor determined that each selected
contract included a success fee (a percentage of the merger or acquisition price) and xed fees for providing a
fairness opinion in connection with the sale. The auditor tested that management determined the transaction
price, allocated the transaction price to the performance obligations, and recognized revenue when (or as) the
separate performance obligations were satised in accordance with FASB ASC Topic 606.
Financial Statement Presentation and Disclosures
Firms did not suiciently evaluate or test:
y The classication of fair value of securities as Level 1, Level 2, or Level 3 as set forth in FASB ASC Topic 820, Fair
Value Measurement; (AS 2502.15)
y Revenue presentation and disclosure, as nancial statements appeared to include:
o Presentation of revenues on a net basis that was not in conformity with FASB ASC Topic 940, Financial Services –
Brokers and Dealers,
o Incomplete revenue recognition policy disclosures under FASB ASC Topic 235, Notes to Financial Statements,
and
o Incomplete qualitative and quantitative disclosures of information regarding revenue from contracts with
customers under FASB ASC Topic 606. (AS 2810.30)
y Statement of cash ows presentation and disclosure, as nancial statements appeared not to have been presented
in conformity with FASB ASC Topic 230, Statement of Cash Flows and excluded required disclosures regarding the
related change in accounting principle under FASB ASC Topic 250, Accounting Changes and Error Corrections. (AS
2810.30)
Deciencies related to the evaluation and disclosure of related parties and going concern are described on pages 15
and 16, respectively.
Identifying and Assessing Risks of Material Misstatement
Insuicient risk assessment procedures contributed to deciencies in areas of the nancial statement audit described
in this report.
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PCAOB Release No. 2020-001 August 20, 2020
Firms did not:
y Obtain a suicient understanding of the selection and application of
accounting principles relating to the broker-dealers’ implementation
of FASB ASC Topic 606. (AS 2110.12)
y Obtain a suicient understanding of the broker-dealers’ internal
control over nancial reporting, including the broker-dealers’
information systems and business processes and control activities,
to identify and assess the risks of material misstatement and design
further audit procedures. (AS 2110.18 and .28)
y Perform suicient procedures to identify and assess the risks
of material misstatement because rms did not, among other
deciencies, identify and assess the risks of material misstatement at
the assertion level for one or more signicant accounts. (AS 2110.59)
y Identify improper revenue recognition as a fraud risk, or did not
evaluate which types of revenue, revenue transactions, or assertions
may give rise to such risks. (AS 2110.68)
y Evaluate the design of the broker-dealers’ controls intended to
address fraud or other signicant risks, and determine whether those
controls had been implemented. (AS 2110.72)
Related Party Relationships and Transactions
Firms did not suiciently:
y Address the identied and assessed risks of material misstatement
because rms performed insuicient testing of allocated revenues
and expenses that related to formal agreements between broker-
dealers and their parents or ailiates, including not suiciently testing
whether the data used to determine the allocated revenues and
expenses was accurate and complete. (AS 2410.11)
y Test the accuracy and completeness of the broker-dealers’
identication of related parties and relationships and transactions
with related parties because rms did not take into account
information gathered during the audit. (AS 2410.14)
y Evaluate disclosures, as nancial statements omitted disclosures
necessary to understand related party relationships and the eects of
related party transactions as set forth in FASB ASC Topic 850, Related
Party Disclosures. (AS 2410.17)
Risk Assessment
As part of their risk assessment
procedures, auditors should obtain
an understanding of the broker-
dealer and its environment, and
its internal control over financial
reporting. Eectively performed risk
assessment procedures enable the
auditor to identify and assess the
risks of material misstatement at
the financial statement level and the
assertion level, including the risk of
material misstatement due to fraud.
The identification and assessment
of risks of material misstatement
should include risks associated with
related parties and relationships and
transactions with related parties.
Factors that auditors should evaluate
in determining which risks are
significant risks include whether the
risk is related to significant economic
developments.
Source: PCAOB AS 2110: Identifying and
Assessing Risks of Material Misstatement
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PCAOB Release No. 2020-001 August 20, 2020
Receivables and Payables
Firms did not:
y Suiciently test the accuracy and completeness of information produced by the broker-dealer used as audit
evidence, whether by testing controls, testing the information, or a combination of both. (AS 1105.10)
y Perform suicient procedures that provided a reasonable basis for extending audit conclusions from an interim
date to the period end. (AS 2301.08 and .45)
y Appropriately design sampling procedures to respond to the risks of material misstatement, which resulted in an
insuicient extent of substantive testing. (AS 2301.08; AS 2315.16)
y Perform suicient tests of controls, including information technology controls, to support control risk assessments
at less than the maximum and the related modications to the nature, timing, and extent of substantive
procedures. (AS 2301.16)
y Perform, or suiciently perform, substantive procedures for relevant assertions, including instances of the use of
negative conrmations when the combined assessed level of inherent and control risk was not low and instances
where the evidence obtained through alternative procedures was not suicient. (AS 2301.36; AS 2310.20 and .33)
Confirmation Procedures
When the auditor has not received replies to positive conrmation requests, the auditor should
apply alternative procedures to the nonresponses to obtain the evidence necessary to reduce
audit risk to an acceptably low level. A broker-dealer recorded receivables from customers in
its nancial statements. The auditor assessed the risk of material misstatement and sent positive conrmation
requests to a sample of customers. The auditor performed alternative procedures for the nonresponses to the
conrmation requests, which included inspecting the customer statements used in the conrmation process,
performing tests of detail of customer activity that aected the receivable balance (e.g., securities purchases
and sales, cash deposits and withdrawals, and dividends and interest), and performing tests of detail of
customer activity in the period subsequent to the nancial statement date.
Consideration of an Entity's Ability to Continue as a Going Concern
Firms did not suiciently evaluate:
y Conditions and events identied through audit procedures that indicated there could be substantial doubt about
broker-dealers’ abilities to continue as a going concern. (AS 2415.03 and .06)
y Management’s plans for dealing with the conditions and events that indicated that there could be substantial
doubt because they did not obtain suicient information to consider whether the plans would have a mitigating
eect, and if so, whether the plans could be eectively implemented. (AS 2415.07)
y Disclosures, as nancial statements omitted disclosures regarding conditions and events that indicated there
could be substantial doubt, broker-dealer managements’ evaluations of their signicance, and any mitigating
factors as set forth in FASB ASC Topic 205, Presentation of Financial Statements, when substantial doubt was
alleviated based primarily on consideration of managements’ plans. (AS 2415.11)
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Consideration of Materiality in Planning and Performing an Audit
Firms did not establish materiality levels for the nancial statements as a whole or did not establish tolerable
misstatement at an amount less than planning materiality. (AS 2105.06 and .08)
Post-Audit Matters
In auditors’ reports on revised broker-dealer nancial statements, rms did not refer to the reasons the nancial
statements were revised, including instances associated with broker-dealers’ implementation of ASC Topic 606. (AS
2905.06)
Risks of Material Misstatement Due to Fraud
Firms did not suiciently examine journal entries and other adjustments to address the risk of management override
of controls. (AS 2401.58)
Auditing Supplemental Information Accompanying Audited Financial Statements
The supporting schedules broker-dealers are required to include in their annual lings with the SEC are required to
be audited in accordance with PCAOB standards. AS 2701 requires auditors to obtain suicient appropriate audit
evidence to support the auditor’s opinion regarding whether the supplemental information is fairly stated, in all
material respects, in relation to the nancial statements as a whole.
Supplemental Information
The supplemental information required by Exchange Act Rule 17a-5(d)(2)(ii) consists of
supporting schedules that present the net capital computation under the Net Capital Rule,
the reserve requirement computations under Exhibit A of the Customer Protection Rule, and
information relating to the requirement for possession or control of customer securities under the Customer
Protection Rule. The reserve requirement computations include the customer reserve computation and the
Proprietary Securities Account of a Broker-Dealer (PAB) account reserve computation.
Deciencies in Auditing Supporting Schedules
2019 2018
Number of
Applicable Audits
Reviewed
Number of Audits
with Deciencies
Percentage Percentage
Net Capital Rule 65 20 31% 29%
Customer Protection Rule 33 14 42% 36%
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PCAOB Release No. 2020-001 August 20, 2020
In particular, when compared to the prior year, we observed an increase in decient procedures for determining
whether the broker-dealer prepared stock record allocation adjustments pursuant to Exhibit A of the Customer
Protection Rule.
The following deciencies were identied in the audit procedures related to supporting schedules:
Performing Audit Procedures on Supplemental Information
Firms did not perform, or suiciently perform, procedures to evaluate whether the following aspects of net capital
computations were determined in compliance with the Net Capital Rule: (AS 2701.04)
y Adjustments to net worth, specically the addition of discretionary and subordinated liabilities;
y Allowable assets and assets not readily convertible into cash, including commissions and concessions receivable;
y Haircuts for securities positions and undue concentration charges; or
y Operational charges and other deductions, including failed security transactions.
Securities Haircuts
A broker-dealer held long positions in government securities in inventory, and used a report
from an internal application that included issuer, maturity, and fair value information for
each security to determine the haircuts on those securities to report in its computation of
net capital. The auditor tested the completeness of the haircut report by reconciling the
government securities included on the report to the broker-dealer’s securities inventory, which was tested
during the nancial statement audit. The auditor tested the accuracy of the haircut report by selecting a
sample of government securities from the report and comparing the maturity dates to the securities inventory,
recalculating the days to maturity, obtaining the applicable haircut percentages from the Net Capital Rule, and
recalculating the haircuts per the report for the securities selected.
Firms did not perform, or suiciently perform, procedures to test whether the information in the customer and PAB
reserve computations was complete, accurate, and compliant with relevant regulatory requirements. This includes
whether the notication obtained from the banks applicable to the special reserve bank account for the exclusive
benet of customers met the requirements of the Reserve Requirements Rule, and procedures related to stock record
allocation adjustments. (AS 2701.04)
Firms did not perform, or suiciently perform, procedures to test the completeness and accuracy of information
related to the possession or control requirements of the Customer Protection Rule, including excess margin
computations, segregation decit reporting, and segregation instructions. (AS 2701.04)
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Possession or Control
A broker-dealer reported no reportable items in the possession or control schedule included
in its nancial statements. The auditor tested the completeness and accuracy of the broker-
dealer’s stock record and customer balances during the nancial statement audit. To test the
schedule, the auditor obtained a decit report generated by the broker-dealer’s internal system.
The auditor tested that the system was programmed to properly calculate decits pursuant to the Customer
Protection Rule, and tested the relevant information technology controls over the system. The auditor tested
completeness of the decit report by reviewing the report logic to determine that it was congured to properly
report all decits. The auditor tested the accuracy of the report by selecting securities decits from the stock
record and the decit report and inspecting evidence that these securities were subject to segregation, both
instructed and accomplished.
Firms did not determine that supporting schedules included information inconsistent with the nancial statements or
the most recent FOCUS report. (AS 2701.04)
Obtaining a Representation Letter
Firms did not obtain written representations from management of the broker-dealer. (AS 2701.05)
Other Instances of Non-Compliance with PCAOB Standards
This section of our report discusses certain deciencies we identied that relate to other instances of non-compliance
with PCAOB standards. These deciencies do not relate directly to the suiciency or appropriateness of evidence
rms obtained to support their audit opinions or attestation reports.
Auditor’s Report on the Financial Statements and Supporting Schedules
Deciencies in the Auditor’s Report
2019 2018
Number of
Applicable Audits
Reviewed
Number of Audits
with Deciencies
Percentage Percentage
Auditor’s Report on the
Financial Statements and
Supporting Schedules
106 15 14% 18%
Certain auditors’ reports on broker-dealer nancial statements and supporting schedules were not presented in
accordance with PCAOB standards. The most frequently occurring deciency related to the identication of the
supplemental information. (AS 2701.10) In certain instances, auditors’ reports on broker-dealer nancial statements
reected the requirements of AS 3101 prior to its amendment, even though the amended standard was eective.
(AS 3101.05-.10) In other instances, auditors’ reports omitted or did not properly present one or more of the required
elements listed below:
y A required element from the opinion on the nancial statement section of the auditor’s report; (AS 3101.08)
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y A statement that the auditor believes that the audit provides a reasonable basis for the auditor’s opinion; (AS
3101.09)
y Tenure for the rm; and (AS 3101.10)
y A required element from the auditor’s report on supplemental information. (AS 2701.10)
In addition, certain auditors’ reports on broker-dealer nancial statements and supporting schedules included report
dates prior to the completion of the audit procedures performed by the rms. (AS 3110.01; AS 2701.12)
Auditor Communications
Deciencies in Auditor Communications
The following deciencies were identied relating to communications required to be made to the broker-dealer’s
audit committee (or equivalent body):
Communications with Audit Committees (or Equivalent Body)
Firms did not document oral communications made to the audit committee (or equivalent body). (AS 1301.25)
Communications about Control Deficiencies
Firms did not communicate in writing to management and the audit committee (or equivalent body) identied
signicant deciencies and material weaknesses. (AS 1305.04)
Engagement Documentation
Deciencies in Documentation
2019 2018
Number of
Applicable Audits
Reviewed
Number of Audits
with Deciencies
Percentage Percentage
Auditor Communications 106 5 5% 12%
2019 2018
Number of
Applicable
Engagements
Reviewed
Number of
Engagements with
Deciencies
Percentage Percentage
Audit Documentation 106 26 25% 25%
Review Documentation 74 8 11% 16%
Firms did not properly complete an engagement completion document, assemble a complete and nal set of audit
and review documentation (“engagement le”) by the documentation completion date, and properly document
additions to the engagement le aer the report release date. (AS 1215.13, .15, and .16)
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PCAOB Release No. 2020-001 August 20, 2020
Quality Control
This section of our report includes observations of rms’ systems of quality control. Our standards require rms
to have a system of quality control that provides reasonable assurance that personnel comply with applicable
professional and rm standards. Observations from our oversight activities have shown that rms’ improvements in
quality control systems can enhance the quality of audits.
Consistent with what we have historically emphasized, a rm’s system of quality control, among other things, should
provide reasonable assurance that for broker-dealer audit and attestation engagements:
y Firms assign engagement partners with knowledge and experience in broker-dealer accounting and regulatory
requirements and PCAOB audit and attestation standards;
y Firms assign engagement quality reviewers that meet the qualications required by PCAOB standards and
establish policies and procedures that cover the execution of engagement quality reviews pursuant to PCAOB
standards;
y Auditors participating in audit and attestation engagements exercise due professional care, including professional
skepticism; and
y Engagement teams identify and document all signicant ndings and issues related to the audit and attestation
engagements.
The results of our 2019 inspections indicate, however, that there is room for improvement. Our observations indicate
that rms’ systems of quality control did not appear to provide reasonable assurance that rm personnel will comply
with applicable professional standards in the areas of: 1) engagement performance; 2) monitoring; 3) independence,
integrity, and objectivity; and 4) personnel management, which are required elements of a system of quality control.
We explore each of these topics further below.
Engagement Performance
Our sta made the following observations related to engagement performance:
y Policies and procedures did not provide reasonable assurance that a complete and nal set of audit and
attestation documentation was assembled for retention as of the documentation completion date, and any
documentation subsequent to the report release date indicated the date the information was added, the name of
the person who prepared the additional documentation, and the reasons for adding it, in accordance with AS 1215.
(QC 20.17)
y Policies and procedures did not provide reasonable assurance that engagement partners reviewed and supervised
audit and attestation engagements with due professional care in accordance with AS 1201, which contributed to
not identifying deciencies in those engagements. (QC 20.18)
y Engagement quality reviews were not performed (AS 1220.01) or did not include a suicient evaluation of the
engagement team’s signicant judgments and the related conclusions reached that formed the overall conclusion
in the engagement report. Based on deciencies identied in audit and attestation engagements, it appears
engagement quality reviewers did not suiciently evaluate the engagement team’s assessment of, and audit
responses to, signicant risks, including fraud risks, and did not suiciently review the nancial statements,
documents containing management’s assertions, and related engagement reports. (AS 1220.09, .10, and .18A) In
addition, it appears engagement quality reviewers did not perform their review with due professional care, which
contributed to not identifying deciencies in engagement areas requiring review. (AS 1220.12 and .18B)
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PCAOB Release No. 2020-001 August 20, 2020
Audit and Attestation Engagements with Deciencies in the Engagement Quality Review Area
2019 2018
Number of
Applicable
Engagements
Reviewed
Number of
Engagements with
Deciencies
Percentage Percentage
Audit Engagements 80 54 68% 65%
Review Engagements 38 27 71% 43%
Examination Engagements 21 2 10% 26%
Monitoring
Procedures for internal inspections did not provide reasonable assurance that rms would detect signicant audit
and attestation deciencies through their monitoring activities. (QC 30.04-.07)
Independence, Integrity, and Objectivity
Policies and procedures did not provide reasonable assurance that the rms would maintain their independence,
particularly related to the general standard of independence and the nancial relationship requirements of Rule 2-01
of SEC Regulation S-X. (QC 20.09)
Personnel Management
Policies and procedures did not provide reasonable assurance that engagement personnel assigned to broker-dealer
engagements complied with the rms’ education requirements. (QC 20.13)
Engagement Quality Review
Engagement quality reviewers should evaluate audit responses to signicant risks identied by
the engagement team, including fraud risks. The engagement team assessed a fraud risk related
to the improper timing of underwriting revenue recognition. The engagement quality reviewer
evaluated the engagement team’s judgments and conclusions regarding the identied fraud risk by reviewing
the substantive testing of underwriting revenue and holding discussions with the engagement team.
Auditor Independence
SEC rules require auditors of broker-dealers to comply with SEC independence requirements. This section of our
report discusses related ndings from our inspections.
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PCAOB Release No. 2020-001 August 20, 2020
2019 2018
Number of
Applicable Audits
Reviewed
Number of Audits
with Findings
Percentage Percentage
Auditor Independence 29 5 17% 5%
Independence Findings
Firms assisted in the preparation of broker-dealer nancial statements and supplemental information, which impaired
their independence. Assistance by the auditor with the preparation of nancial statements and supplemental
information being audited is not a permissible service as prescribed by Rule 2-01(c)(4)(i) of SEC Regulation S-X.
Firms included indemnication clauses in engagement letters, which impaired their independence based on the
general standard of independence as prescribed by Rule 2-01(b) of SEC Regulation S-X.
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PCAOB Release No. 2020-001 August 20, 2020
PCAOB Standards Associated with Inspection Observations
QC 20 System of Quality Control for a CPA Firm’s Accounting and Auditing Practice
QC 30 Monitoring a CPA Firm’s Accounting and Auditing Practice
AS 1105 Audit Evidence
AS 1201 Supervision of the Audit Engagement
AS 1215 Audit Documentation
AS 1220 Engagement Quality Review
AS 1301 Communications with Audit Committees
AS 1305 Communications About Control Deciencies in an Audit of Financial Statements
AS 2105 Consideration of Materiality in Planning and Performing an Audit
AS 2110 Identifying and Assessing Risks of Material Misstatement
AS 2301 The Auditor’s Responses to the Risks of Material Misstatement
AS 2305 Substantive Analytical Procedures
AS 2310 The Conrmation Process
AS 2315 Audit Sampling
AS 2401 Consideration of Fraud in a Financial Statement Audit
AS 2410 Related Parties
AS 2415 Consideration of an Entity’s Ability to Continue as a Going Concern
AS 2502 Auditing Fair Value Measurements and Disclosures
AS 2601 Consideration of an Entity’s Use of a Service Organization
AS 2701 Auditing Supplemental Information Accompanying Audited Financial Statements
AS 2810 Evaluating Audit Results
AS 2905 Subsequent Discovery of Facts Existing at the Date of the Auditor's Report
AS 3101 The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualied Opinion
AS 3110 Dating of the Independent Auditor’s Report
AT No. 1 Examination Engagements Regarding Compliance Reports of Brokers and Dealers
AT No. 2 Review Engagements Regarding Exemption Reports of Brokers and Dealers
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PCAOB Release No. 2020-001 August 20, 2020
Appendix A: Selection of Firms and Engagements for
Inspections
The following information provides an overview of the rms that have been subject to our inspection procedures.
Because our inspection process evolves over time, it can, and oen does, focus on a dierent mix of rms and
engagements from year to year. We selected 66 rms for inspection during 2019.
3
These inspections covered 106
audits of nancial statements and 103 attestation engagements of broker-dealers that had nancial statement periods
ended during the period April 1, 2018 through March 31, 2019. These selections were made from the population of
rms and broker-dealer audits depicted in the following table.
Number of Broker-Dealer Audits Per Firm Number of Firms Number of Broker-Dealer Audits
1 123 123
2 to 20 245 1,287
21 to 50 27 822
51 to 100 12 810
More than 100 4 579
Total 411 3,621
The rms and the audit and attestation engagements were generally selected based on characteristics of the rms
and the broker-dealers. The rm characteristics included, among others:
y The number of broker-dealer audits performed;
y Whether the rm conducted examination engagements;
y Whether the rm also issued audit reports for issuers;
y Previous inspection results;
y History of the rm or rm personnel in auditing broker-dealers; and
y The existence of disciplinary actions against the rm or engagement partner by the SEC, PCAOB, or other
regulatory authorities.
The selection of the rms’ broker-dealer engagements was based on various characteristics, including:
y Whether the broker-dealer led a compliance report with the SEC pursuant to Exchange Act Rule 17a-5;
y Whether the broker-dealer was a subsidiary of an issuer and its signicance to the issuer’s consolidated nancial
statements;
y Changes in auditors and certain circumstances related to the changes;
y Financial metrics;
3
See footnote 1 on page 4.
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PCAOB Release No. 2020-001 August 20, 2020
Number of Broker-Dealer Audits Per Firm Number of Firms Inspected Number of Audits Reviewed
1 10 10
2 to 20 32 33
21 to 50 14 19
51 to 100 6 12
More than 100 4 32
Total 66 106
Firms Number of Firms Inspected Number of Audits Reviewed
Also Audited Issuers 37 73
Did Not Audit Issuers 29 33
Total 66 106
Firms Number of Firms Inspected Number of Audits Reviewed
Audited Broker-Dealers That Filed
Compliance Reports
21 58
Only Audited Broker-Dealers That Filed
Exemption Reports
45 48
Total 66 106
y Existence of disciplinary actions against the broker-dealer by the SEC, FINRA, or other regulatory authorities; and
y Engagement partner’s workload, experience in auditing broker-dealers, and previous inspection results.
We also selected a number of engagements randomly.
Selection of Firms for Inspection and Audit and Attestation Engagements for
Review in 2019
The following tables present information about the rms inspected in 2019 and the number of audits and attestation
engagements reviewed during those inspections. The tables provide the number of broker-dealer audits performed
by the inspected rms, as determined at the time of the inspection, whether or not the rms also audited issuers, and
whether the rms audited broker-dealers that led a compliance report or only audited broker-dealers that led an
exemption report.
At the time of the 2019 inspections, of the 37 rms that also audited issuers, four audited more than 100 issuers and
33 audited 100 or fewer issuers.
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PCAOB Release No. 2020-001 August 20, 2020
Broker-Dealers Number of Audits Reviewed
Range of Minimum Net
Capital Requirements
(Thousands)
Range of Actual Net Capital
Reported at Fiscal Year End
(Thousands)
Did Not Claim Exemption 33 $30 - $3,000,000 $250 - $17,000,000
Claimed Exemption 73 $5 - $1,600 $9 - $180,000
Total 106 $5 - $3,000,000 $9 - $17,000,000
Broker-Dealers Filed
Number of Attestations
Covered
Range of Minimum Net
Capital Requirements
(Thousands)
Range of Actual Net Capital
Reported at Fiscal Year End
(Thousands)
Compliance Report 29 $250 - $3,000,000 $250 - $17,000,000
Exemption Report 74 $5 - $1,600 $9 - $180,000
The following tables present the number of audits and attestation engagements reviewed during the inspections in
2019, the ranges of minimum net capital requirements and actual net capital reported for the broker-dealers that
led either a compliance report or an exemption report, stratied by whether the broker-dealer did or did not claim
an exemption, and whether the broker-dealer led a compliance report or an exemption report (on the basis of either
one or more exemptions claimed or applicable SEC and SEC sta guidance).
Three of the 106 audits reviewed during the inspections had a related attestation engagement that was not reviewed
during the inspection.
Selection of Firms for Inspections and Audit and Attestation Engagements for
Reviews since Inception of the Interim Program in 2011
The following table presents the number of rms inspected, the number of audits reviewed during the inspections,
and the number of attestation engagements covered by the inspections, stratied by the number of broker-dealer
audits per rm.
Number of Broker-Dealer Audits
Per Firm
Number of Firms
Inspected
Number of Audits
Reviewed
Number of
Examinations
Covered
Number of Reviews
Covered
1 77 78 5 44
2 to 20 253 329 34 188
21 to 50 41 125 11 54
51 to 100 17 70 8 43
More than 100 7 239 72 94
Total 370 841 130 423
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The sum of the number of rms inspected does not total to 370 because 25 rms that were inspected more than once
since the inception of the interim inspection program are reported in multiple stratications due to changes in the
number of broker-dealer audits performed by those rms. In addition, one rm that audited one broker-dealer was
inspected more than once.
The following table presents the number of rms inspected, the number of audits reviewed during the inspections,
and the number of attestation engagements covered by the inspections, stratied by whether or not the rms also
audited issuers.
Firms
Number of Firms
Inspected
Number of Audits
Reviewed
Number of
Examinations
Covered
Number of Reviews
Covered
Also Audited Issuers 159 546 115 266
Did Not Audit Issuers 217 295 15 157
Total 370 841 130 423
The sum of the number of rms inspected does not total to 370 because six rms that were inspected more than once
since the inception of the interim inspection program are reported in both stratications due to a change over time in
whether the rms also audited issuers.
The following table presents the ranges of minimum net capital requirements and actual net capital reported for
the broker-dealers whose engagements were covered in the inspections that led either a compliance report or
an exemption report, stratied by whether the broker-dealer did or did not claim exemption from the Customer
Protection Rule.
Broker-Dealers
Number of Audits
Reviewed
Range of Minimum Net
Capital Requirements
(Thousands)
Range of Actual Net
Capital Reported at Fiscal
Year End (Thousands)
Did Not Claim Exemption 207 $5 - $3,000,000 $250 - $17,000,000
Claimed Exemption 634 $5 - $82,000 $6 - $2,250,000
The requirement for broker-dealer audits to be performed in accordance with PCAOB standards, and the requirement
for broker-dealers to le compliance or exemption reports, was eective for broker-dealer annual reports with scal
years ended on or aer June 1, 2014. The following table presents the number of rms where inspections addressed
whether engagements were conducted in accordance with PCAOB standards. The table also presents the number
of audits reviewed during the inspections, and the number of attestation engagements covered by the inspections,
stratied by whether the rms audited broker-dealers that led compliance reports or only audited broker-dealers
that led exemption reports.
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PCAOB Release No. 2020-001 August 20, 2020
Firms
Number of Firms
Inspected
Number of Audits
Reviewed
Number of
Examinations
Covered
Number of Reviews
Covered
Audited Broker-Dealers That
Filed Compliance Reports
64 292 130 158
Only Audited Broker-Dealers
That Filed Exemption Reports
221 268 N/A 265
Total 276 560 130 423
The number of rms inspected does not total to 276 because nine rms that were inspected more than once are
included in both stratications due to a change over time in whether the rms also audited broker-dealers that
led compliance reports. In addition, two of the rms inspected that only audited one broker-dealer and those
broker-dealers did not le either a compliance or an exemption report are not included in this table. Certain audits
reviewed during the inspections also (1) did not have a related attestation engagement, (2) had a related attestation
engagement not covered during the inspection, or (3) had more than one related attestation engagement covered
during the inspection.
The following table presents the ranges of minimum net capital requirements and actual net capital reported for
the broker-dealers whose engagements were covered in the inspections that led either a compliance report or an
exemption report, stratied by the type of report led.
Broker-Dealers Filed
Number of Audits
Reviewed
Range of Minimum Net
Capital Requirements
(Thousands)
Range of Actual Net
Capital Reported at Fiscal
Year End (Thousands)
Compliance Report 130 $100 - $3,000,000 $250 - $17,000,000
Exemption Report 423 $5 - $82,000 $6 - $300,000
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PCAOB Release No. 2020-001 August 20, 2020
Appendix B: Comparative Results from Our Inspections
under the Interim Program
Since the inception of the interim inspection program in 2011, the PCAOB has performed 542 inspections of 370 of the
rms that conducted audits of broker-dealers. The 542 inspections covered portions of 841 audits, of which 562 were
required to be performed in accordance with PCAOB standards, and 279 were required to be performed in accordance
with generally accepted auditing standards. These audits had nancial statement periods ended December 31, 2010
through March 31, 2019.
The inspections covered 553 attestation engagements that were required to be performed in accordance with PCAOB
standards. These attestation engagements had nancial statement periods ended June 30, 2014 through March 31,
2019.
Deficiency Classification
We have reclassied certain deciencies from 2018 and 2017 inspections reported in the previous annual report to
conform to the classication of deciencies from 2019 inspections. The classication of 2019 inspections deciencies
includes areas not previously reported, either due to the frequency with which we observed the deciency in prior
years, or because some or all of the deciencies were combined with another deciency area. The purpose of the
reclassication was to align the deciencies with the primary standard to which the deciency related. The areas
aected by the reclassication are:
y Revenue;
y Financial Statement Presentation and Disclosures;
y Identifying and Assessing the Risks of Material Misstatement;
y Related Party Relationships and Transactions;
y Receivables and Payables;
y Consideration of an Entity’s Ability to Continue as a Going Concern;
y Risks of Material Misstatement Due to Fraud; and
y Auditor Communications.
In this appendix, the term cumulative refers to the inspections conducted during 2014 through 2019 that covered
audits and attestation engagements required to be performed in accordance with PCAOB standards. Cumulative
results include inspections results from years 2014 through 2016, which have not been reclassied.
We do not review every aspect of the audit, and not all areas were included for each broker-dealer audit engagement
inspected. Rather, we generally focus our attention on areas we believe to be of greater complexity, and areas of
greater signicance or with a heightened risk of material misstatement to the broker-dealer’s nancial statements.
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PCAOB Release No. 2020-001 August 20, 2020
Summary of Findings and Deficiencies
The table below summarizes the independence ndings and audit, attestation, and other deciencies identied from
reviews of audits and attestation engagements performed in accordance with PCAOB standards under the interim
inspection program through 2019.
4
Attestation and other deciencies in this table include deciencies in attestation
procedures, documentation, and engagement quality reviews.
Inspection Year
Percentage of
Audits with
Independence
Findings
Audits with
Audit and Other
Deciencies
Areas with
Audit and Other
Deciencies
Examinations
with Attestation
and Other
Deciencies
Reviews with
Attestation and
Other Deciencies
2019 17% 71% 27% 69% 51%
2018 5% 76% 29% 75% 54%
2017 8% 76% 28% 70% 40%
Cumulative 9% 77% 31% 72% 47%
On an overall basis, the percentages of audits, areas, and attestation engagements with deciencies identied in 2019
remained high, though the percentages of audits, areas, and examination engagements with deciencies decreased
when compared to 2018 and 2017. The percentage of review engagements with deciencies decreased in 2019 when
compared to 2018, but increased when compared to 2017. The percentage of audits with independence ndings in
2019 increased when compared to 2018 and 2017.
4
See footnote 1 on page 4.
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PCAOB Release No. 2020-001 August 20, 2020
Attestation, Audit, and Other Deficiencies
Deciencies
Percentage of Applicable Engagements with Deciencies
2019 2018 2017
Deciencies in Attestation Procedures
Examination Engagements 69% 75% 70%
Review Engagements 49% 51% 38%
Deciencies in Auditing Supporting Schedules
Customer Protection Rule 42% 36% 48%
Net Capital Rule 31% 29% 36%
Deciencies in Auditing Financial Statements
Consideration of an Entity's Ability to Continue as a
Going Concern
67% 40% 50%
Revenue 53% 60% 65%
Post-Audit Matters 43% 0% 0%
Risks of Material Misstatement Due to Fraud 38% 12% 24%
Financial Statement Presentation and Disclosures 37% 27% 23%
Related Party Relationships and Transactions 27% 55% 42%
Receivables and Payables 27% 21% 31%
Identifying and Assessing Risks of Material
Misstatement
15% 23% 24%
Consideration of Materiality in Planning and
Performing an Audit
4% 3% 3%
Fair Value Measurements 0% 14% 20%
Other Instances of Non-Compliance with PCAOB Standards
Audit Documentation 25% 25% 13%
Auditor’s Report on the Financial Statements and
Supporting Schedules
14% 18% 10%
Review Documentation 11% 16% 6%
Auditor Communications 5% 12% 20%
Examination Documentation 0% 0% 7%
Deciencies in Engagement Quality Reviews
Review Engagements 71% 43% 26%
Audit Engagements 68% 65% 59%
Examination Engagements 10% 26% 20%
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PCAOB Release No. 2020-001 August 20, 2020
Attestation, Audit, and Other Deficiencies by Firm Characteristics
The following tables present the percentages of audit, attestation, and other deciencies for the periods indicated,
stratied by certain rm characteristics.
Firms That Audited Broker-Dealers That Filed Compliance Reports and Firms That Audited Broker-
Dealers That Filed Only Exemption Reports
We noted for audit and review engagements that rms that audited broker-dealers that led compliance reports had
signicantly lower percentages of deciencies when compared to rms that audited broker-dealers that led only
exemption reports. Firms that audited broker-dealers that led compliance reports also had lower percentages of
audits, areas, and examination engagements with deciencies in 2019, compared to 2018 and 2017; the percentage of
review engagements with deciencies was lower in 2019 compared to 2018, but higher compared to 2017.
Percentage of
Audits with Audit and Other Deciencies Areas with Audit and Other Deciencies
2019 2018 2017 2019 2018 2017
Firms That
Audited Broker-
Dealers That
Filed Compliance
Reports
57% 64% 66% 16% 21% 21%
Firms That
Audited Broker-
Dealers That Filed
Only Exemption
Reports
88% 91% 85% 40% 40% 35%
Percentage of
Examinations with Attestation and Other
Deciencies
Reviews with Attestation and Other Deciencies
2019 2018 2017 2019 2018 2017
Firms That
Audited Broker-
Dealers That
Filed Compliance
Reports
69% 75% 70% 30% 41% 17%
Firms That
Audited Broker-
Dealers That Filed
Only Exemption
Reports
N/A N/A N/A 64% 64% 52%
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PCAOB Release No. 2020-001 August 20, 2020
Firms That Also Audited Issuers and Firms That Did Not Audit Issuers
We noted that the corresponding deciencies were generally lower at rms that also audited issuers for all
stratications. In addition, we noted that the percentage of attestation and other deciencies was higher for
examinations of broker-dealers that led a compliance report compared to reviews of broker-dealers that led an
exemption report, both at rms that also audited issuers and those that did not, for all periods presented.
Percentage of
Audits with Audit and Other Deciencies Areas with Audit and Other Deciencies
2019 2018 2017 2019 2018 2017
Firms That Also Audited Issuers: 59% 70% 70% 18% 24% 24%
Broker-Dealers That Filed a
Compliance Report
59% 63% 83% 14% 20% 30%
Broker-Dealers That Filed an
Exemption Report
59% 74% 65% 20% 26% 22%
Firms That Did Not Audit Issuers: 97% 91% 96% 47% 42% 41%
Broker-Dealers That Filed a
Compliance Report
100% 100% 100% 47% 20% 44%
Broker-Dealers That Filed an
Exemption Report
97% 90% 95% 47% 43% 41%
Percentage of Attestations with
Attestation and Other Deciencies
2019 2018 2017
Firms That Also Audited Issuers: 49% 52% 43%
Broker-Dealers That Filed a Compliance Report 65% 73% 71%
Broker-Dealers That Filed an Exemption Report 40% 43% 32%
Firms That Did Not Audit Issuers: 72% 75% 64%
Broker-Dealers That Filed a Compliance Report 100% 100% 67%
Broker-Dealers That Filed an Exemption Report 69% 73% 64%
Firms
Cumulative Percentage of
Audits with
Audit and Other
Deciencies
Areas with Audit and
Other Deciencies
Examinations with
Attestation and
Other Deciencies
Reviews with
Attestation and
Other Deciencies
Also Audited Issuers 68% 23% 70% 35%
Did Not Audit Issuers 96% 50% 93% 69%
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PCAOB Release No. 2020-001 August 20, 2020
Number of Broker-Dealer Audits Per Firm
2019 Inspections
Broker-
Dealer
Audits Per
Firm
Number
of Firms
Inspected
Number
of Audits
Reviewed
Percentage
of Audits
with Audit
and Other
Deciencies
Percentage
of Areas
with Audit
and Other
Deciencies
Examination
Engagements
Covered
Percentage of
Examinations
with
Attestation
and Other
Deciencies
Review
Engagements
Covered
Percentage of
Reviews with
Attestation
and Other
Deciencies
1 10 10 90% 48% N/A N/A 9 67%
2 to 20 32 33 82% 35% 5 60% 27 70%
21 to 50 14 19 84% 31% 6 83% 13 69%
51 to 100 6 12 83% 32% 2 100% 9 22%
More
than 100
4 32 41% 8% 16 63% 16 13%
Total 66 106 71% 27% 29 69% 74 51%
2018 Inspections
Broker-
Dealer
Audits Per
Firm
Number
of Firms
Inspected
Number
of Audits
Reviewed
Percentage
of Audits
with Audit
and Other
Deciencies
Percentage
of Areas
with Audit
and Other
Deciencies
Examination
Engagements
Covered
Percentage of
Examinations
with
Attestation
and Other
Deciencies
Review
Engagements
Covered
Percentage of
Reviews with
Attestation
and Other
Deciencies
1 8 8 88% 43% 2 100% 6 67%
2 to 20 43 46 93% 36% 7 100% 40 70%
21 to 50 5 6 83% 35% N/A N/A 6 83%
51 to 100 7 13 69% 29% 2 100% 11 45%
More
than 100
4 32 50% 14% 13 54% 16 6%
Total 67 105 76% 29% 24 75% 79 54%
Number of Broker-Dealer
Audits Per Firm
Cumulative Percentage of
Audits with
Audit and Other
Deciencies
Areas with Audit and
Other Deciencies
Examinations with
Attestation and
Other Deciencies
Reviews with
Attestation and
Other Deciencies
1 90% 50% 100% 68%
2 to 20 92% 42% 88% 62%
21 to 50 75% 30% 91% 41%
51 to 100 79% 32% 100% 33%
More than 100 53% 12% 57% 18%
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PCAOB Release No. 2020-001 August 20, 2020
We noted that rms that audited more than 100 broker-dealers had generally lower percentages of deciencies,
sometimes signicantly so, than rms that audited 100 or fewer broker-dealers in 2019, 2018, and on a cumulative
basis.
Attestation, Audit, and Other Deficiencies by Inspection Considerations
The following tables present the percentages of audit and attestation engagements with deciencies, stratied by
the frequency with which the rm has been inspected, and whether the broker-dealers whose engagements were
reviewed were selected at random or based on risk characteristics:
Firms Inspected More Than Once
Six rms inspected during 2019 were also inspected during 2018, 2017, 2016, and 2015. The following table presents a
summary of deciencies for these rms by year.
For rms inspected in all ve years, the percentage of audits and areas with deciencies decreased in 2019 compared
to the earlier years. The percentage of examination engagements with deciencies increased in 2019 compared to
the earlier years other than 2017, when the percentage was the same. The percentage of review engagements with
deciencies remained the same in 2019 compared to 2018, and decreased when compared to the earlier years. The
individual rm results varied.
An additional 51 rms were inspected more than once, but not in all ve years, during 2015 through 2019. Of these
rms, 43 were inspected twice during that period, and 19 were inspected for the second time in 2019. The following
table shows the results from the most recent inspections and the results from the initial inspections of these 51
rms. The table shows the percentage of audits, areas, and attestation engagements with deciencies. Attestation
deciencies are included if the type of attestation engagement (examination or review) was the same for the most
recent inspection and the initial inspection of a rm.
Inspection Year
Percentage of
Audits with
Audit and Other
Deciencies
Areas with Audit and
Other Deciencies
Examinations with
Attestation and
Other Deciencies
Reviews with
Attestation and
Other Deciencies
2019 44% 8% 65% 11%
2018 50% 15% 57% 11%
2017 59% 15% 65% 18%
2016 59% 11% 57% 22%
2015 49% 11% 46% 27%
Inspection Year
Percentage of
Audits with
Audit and Other
Deciencies
Areas with Audit and
Other Deciencies
Examinations with
Attestation and
Other Deciencies
Reviews with
Attestation and
Other Deciencies
Most Recent Inspections 83% 32% 90% 51%
Initial Inspections 92% 39% 100% 43%
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PCAOB Release No. 2020-001 August 20, 2020
We noted that the percentage of audits, areas, and examination engagements with deciencies was lower in the
subsequent inspections when compared to the initial inspections, while the percentage of review engagements with
deciencies was higher.
Broker-Dealers Selected on a Random Basis Whose Engagements Were Reviewed During 2019
During 2019, we selected 15 broker-dealers whose audits and attestation engagements were covered by the
inspections at random. The areas reviewed during these inspections were selected individually based on risk
factors, including past inspection experience. The following table shows the percentage of audits, areas, and review
engagements with deciencies for the engagements related to broker-dealers selected at random and those related
to broker-dealers selected based on risk characteristics.
We noted that the percentage of audits, areas, and review engagements with deciencies was lower in the random
selections when compared to the risk-based selections. Five of the 15 audits and related attestation engagements for
broker-dealers selected at random had no deciencies.
Attestation, Audit, and Others Deficiencies by Broker-Dealer Characteristics
The following tables present audit, attestation, and other deciencies stratied by whether the broker-dealers did not
claim, or claimed, exemption from the Customer Protection Rule.
Percentage of Audits with Audit, Attestation, and Other Deficiencies Stratified by Whether or Not the
Broker-Dealer Claimed Exemption from the Customer Protection Rule
Audits with Audit and Other
Deciencies
Areas with Audit and Other
Deciencies
Reviews with Attestation
and Other Deciencies
Risk-Based Selections 71% 27% 56%
Random Selections 67% 24% 33%
Broker-Dealers
Cumulative Percentage of
Audits with
Audit and Other
Deciencies
Areas with Audit and
Other Deciencies
Examinations with
Attestation and
Other Deciencies
Reviews with
Attestation and
Other Deciencies
Did Not Claim Exemption 73% 25% 72% 55%
Claimed Exemption 78% 33% (•) 47%
• One broker-dealer claimed an exemption from Rule 15c3-3 and led both a compliance report and exemption report. We identied
deciencies in the examination engagement.
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PCAOB Release No. 2020-001 August 20, 2020
Audit and Other Deficiencies Related to the Audit – Broker-Dealers that did not Claim Exemption from
the Customer Protection Rule
Audit and Other Deciencies
2019 2018 2017
Number of
Applicable
Audits
Reviewed
Number of
Audits with
Deciencies
Percentage
of Audits
with
Deciencies
Percentage
of Audits
with
Deciencies
Percentage
of Audits
with
Deciencies
Deciencies in Auditing Supporting Schedules
Net Capital Rule 18 5 28% 30% 47%
Customer Protection Rule 29 12 41% 33% 50%
Deciencies in Auditing Financial Statements
Revenue 29 12 41% 36% 71%
Financial Statement Presentation and
Disclosures
33 2 6% 14% 7%
Identifying and Assessing Risks of Material
Misstatement
33 4 12% 14% 29%
Related Party Relationships and Transactions 10 2 20% 58% 38%
Receivables and Payables 11 4 36% 21% 56%
Consideration of an Entity's Ability to
Continue as a Going Concern
2 2 100% 0% 0%
Consideration of Materiality in Planning and
Performing an Audit
33 1 3% 4% 11%
Post-Audit Matters 3 0 0% 0% 0%
Risks of Material Misstatement Due to Fraud 4 0 0% 25% 38%
Fair Value Measurements 10 0 0% 14% 0%
Other Instances of Non-Compliance with PCAOB Standards
Auditor's Report on the Financial Statements
and Supporting Schedules
33 1 3% 7% 4%
Auditor Communications 33 1 3% 14% 29%
Audit Documentation 33 3 9% 0% 14%
Deciencies in Engagement Quality Reviews
Audit Engagements 24 8 33% 44% 46%
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PCAOB Release No. 2020-001 August 20, 2020
Audit and Other Deficiencies Related to the Audit – Broker-Dealers that Claimed Exemption from the
Customer Protection Rule
Audit and Other Deciencies
2019 2018 2017
Number of
Applicable
Audits
Reviewed
Number of
Audits with
Deciencies
Percentage
of Audits
with
Deciencies
Percentage
of Audits
with
Deciencies
Percentage
of Audits
with
Deciencies
Deciencies in Auditing Supporting Schedules
Net Capital Rule 47 15 32% 29% 33%
Customer Protection Rule 4 2 50% 100% 0%
Deciencies in Auditing Financial Statements
Revenue 68 39 57% 69% 63%
Financial Statement Presentation and
Disclosures
73 37 51% 31% 28%
Identifying and Assessing Risks of Material
Misstatement
73 12 16% 26% 23%
Related Party Relationships and Transactions 27 8 30% 54% 44%
Receivables and Payables 15 3 20% 21% 6%
Consideration of an Entity's Ability to
Continue as a Going Concern
7 4 57% 43% 54%
Consideration of Materiality in Planning and
Performing an Audit
73 3 4% 3% 1%
Post-Audit Matters 4 3 75% 0% 0%
Risks of Material Misstatement Due to Fraud 4 3 75% 0% 18%
Fair Value Measurements 11 0 0% 14% 33%
Other Instances of Non-Compliance with PCAOB Standards
Auditor's Report on the Financial Statements
and Supporting Schedules
73 14 19% 22% 13%
Auditor Communications 73 4 5% 12% 17%
Audit Documentation 73 23 32% 34% 13%
Deciencies in Engagement Quality Reviews
Audit Engagements 56 46 82% 71% 64%
