Tuesday, December 12, 2017
Business

Government watchdog finds flaws in securities accounting

WASHINGTON — A watchdog agency for the accounting industry says it has found numerous flaws in how some firms audited securities brokerages.

The five-month inspection by the Public Company Accounting Oversight Board, its first such inspection, covered a sample of 23 audits of brokerages done by 10 accounting firms. The inspection found deficiencies in all 23 audits, the board said in a report Monday.

The auditing firms' lapses included a failure to adequately verify how much financial cushion the brokerages held against potential losses and the accuracy of revenue figures the brokerages provided.

The report didn't name the auditing firms or the brokerages whose audits were reviewed. But the brokerages whose audits were inspected are a small slice of the 4,400 or so brokerage firms registered with the Securities and Exchange Commission that serve individual and institutional investors.

The board said its inspection results show that some auditors weren't properly fulfilling their duty to provide an independent check on the brokerages.

"Even with this small group of audits inspected thus far, the results are disturbing," said board member Jeanette Franzel, a former managing director of the Government Accountability Office, the auditing agency for the federal government.

Congress created the oversight board in 2002 to replace the accounting industry's own regulators in response to the wave of business scandals that began with Enron Corp. The board has subpoena power and authority to discipline accountants.

The board has been inspecting accounting firms' audits of public companies since it started operations in 2003. In February, it fined a major accounting firm, Ernst & Young, $2 million for alleged lapses in three audits of Medicis Pharmaceutical Corp.

The financial regulatory law enacted in 2010 expanded the board's authority to include inspecting audits of securities brokerage firms.

Some of the flaws the board revealed Monday relate to brokerages' protection of customer money. For example, some securities brokerages are required to maintain a reserve account for customers' funds. In all 14 audits of brokerages that claimed an exemption from that requirement, the accounting firms didn't properly verify that the brokerages were entitled to the exemption, the inspection found.

The inspection found that one accounting firm failed in two audits to maintain its independence from the brokerage firm it audited, in violation of SEC rules. The firm breached its independence by helping the brokerage prepare the financial statements it audited, the report said.

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