Low-Quality Brokerage Audits Reflect Accounting’s Larger Problem

Even though audit quality is an issue in all industries, audits of broker-dealers are unique. Such audits frequently are complex and require testing of multiple revenue line items with typically small margins and low materiality thresholds. They require deep technical and industry knowledge and a strong understanding and testing of the systems that produce the final revenue figures in financial statements.

Perhaps the complexity of these audits are behind the 70% deficiency rate found during the Public Company Accounting Oversight Board’s inspections in 2023, the second consecutive year of such deficiencies. This mirrors a trend observed in inspections of registered public accounting firms, particularly those not subject to annual inspections. Audit quality is perceived to be declining at a time when public pressure from the PCAOB and investors is growing.

The lower materiality thresholds and lower margins on broker-dealers generally require auditors to seek larger sample sizes, more detailed testing, and more experienced staff on a given engagement. In short, broker-dealer audits often require a high amount of effort for a relatively low fee. In an era of staffing concerns, quality declines are a logical, if unfortunate, outcome.

When the broker-dealer deficiencies are considered with other auditor inspection reports, it doesn’t seem a stretch to suggest that declining quality on broker-dealer audits is at best a recent pattern and at worst a trend. We likely won’t see a meaningful reversal as long as accountant pipeline issues persist.

Since 2016, the profession has seen a diminished number of people wanting to become certified public accountants as more and more long-serving CPAs retire. This has left a talent vacuum with little reinforcements waiting in the wings. Efforts by the AICPA, NASBA, state boards of accounting, and state legislatures (such as those in Minnesota, South Carolina, and California) will take years to be implemented and take effect, even if they’re launched without delay.

Multiple surveys of professionals have cited a lack of qualified applicants as a threat to business models. Public companies—the most notable example being Tupperware—and municipalities also have filed that the inability to staff positions or find auditors to engage for their audits is leading to delayed filings and errors. Broker-dealer audits appear to be subject to the same constraints.

Fortunately, audit quality on broker-dealers measured at the engagement level can be improved by throwing resources and more staff at the issue. Public accounting firms are investing heavily in their global capability centers, artificial intelligence capabilities, and employee upskilling in data analysis and other advanced technologies. These investments should allow the firms to increase the scope and coverage provided by their audit evidence gathering procedures despite staffing concerns. But these options will take time.

Domestic and global staff must be trained in the newest data analysis techniques and AI capabilities and confident they can apply what they learn to their broker-dealer clients. Audit senior managers and partners who didn’t rise through the ranks when such technologies were available need training on how they work and how to verify and review the work of staff using them.

Audit standards—many of which haven’t been meaningfully updated to reflect the current audit tools, technologies, and skills of many auditors—must keep evolving to allow for such innovations. Despite recent updates to confirmation standard AS 2310 and the modernization of general responsibilities of the auditor into AS 1000, many accounting standards are still from 2003 following the passage of the Sarbanes-Oxley Act.

Broker-dealer auditors’ deficiencies are rising similarly to auditors in general. But the solutions to reverse the trend are ready and clear: hire more staff, increase training, adopt technology faster, and update audit standards.

Firms and standard setters alike are already working to implement these solutions. The faster they do, the faster we’ll see broker-dealer audits improve. We may look back at the recent inspection report as the low mark in audit quality before auditors returned to the quality they expect to deliver and investors demand. The roadmap to get there is right in front of them.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jack Castonguay is a CPA, assistant professor of accounting at Hofstra University, and vice president of content development at KnowFully Learning Group.

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