October 2011 | accounting today 19
SEC scrutiny for broker-dealers
By Brian Wallace
The Securities and exchange commission’s proposed changes
to broker-dealer financial reporting regulations could have a
major impact on auditing firms that service broker-dealers.
The impact on auditors of proposed changes to reporting rules
able them to identify potential inconsistencies or red flags in a more timely fashion, at
which time a more focused examination of
the broker-dealer could be initiated.
On June 15, 2011, the SEC proposed
amendments to Rule 17a- 5, also known as
the “broker-dealer financial reporting rule.”
The proposed amendments were posted to
the Federal Register on June 27, 2011.
The amendments focused on three key
areas: changes to the annual reporting requirements; an unaudited quarterly report
related to custody; and SEC access to auditors and audit documentation. The spirit of
the amendments is to make the audit and
compliance rules related to broker-dealers
more consistent with current accounting and
auditing standards, as well as the provisions
of the Dodd-Frank Act.
The requirements of broker-dealers to file an
annual report consisting of audited finan-
cial statements and supporting schedules
remains unchanged. However, the amend-
ments require additional reports to be filed.
Carrying broker-dealers would be required to
file a management report asserting compli-
ance with specified rules and related internal
controls, as well as a report from their audi-
tors that addresses those assertions.
Brian Wallace, CPA, is a partner in
the New Brunswick, N.J., office of
WithumSmith+Brown, and is the broker-dealer team leader in the firm’s Financial
Services Group. Reach him at (732) 828-
1614 or email@example.com.
The commission is proposing the creation
of a new “Form Custody” to be filed in conjunction with a broker-dealer’s quarterly
Focus Report. The form is designed to help
regulators identify potential abuses related
to customer assets. It is intended to provide
regulators with better information on the
broker-dealer’s custodial activities and en-
ACCESS TO AUDIT DOCUMENTATION
This proposed amendment specifically relates to broker-dealers that clear transactions
or carry customer accounts. It would require
that such broker-dealers consent to permit-ting their independent public accountant to
make available to the SEC and the examination staff of the broker-dealer’s designated
examining authority the audit documentation associated with its annual audit reports
required under Rule 17a- 5, and to discuss
findings relating to the reports with them.
The purpose of this is to enable the SEC
and the DEA to more quickly identify areas
of higher risk to help them perform more targeted and effective examinations of the broker-dealer. Clearing brokers have been specifically targeted (and introducing brokers
specifically excluded) because of the inherent complexities in their business models.
It is clear that these amendments will have
a significant impact on broker-dealers and
accounting firms currently auditing broker-dealers. With the additional regulatory
and reporting requirements, and the audit
documentation burden required under
PCAOB auditing standards, the status of this
proposed amendment should be followed
closely so auditors can be prepared.
A complete copy of the proposed amendments to Rule 17a- 5 is available on the SEC’s
Web site, SEC.gov. AT
LETTER CAMPAIGN SUPPORTS
PRIVATE STANDARDS BOARD
NEW YORK — Close to 2,500 letters have
been written to the Financial Accounting
Foundation supporting the creation of
a separate standards board for private
company accounting, according to the
American Institute of CPAs.
At the Spring Meeting of Council,
AICPA president and CEO Barry Melancon encouraged CPAs to write to the
FAF to encourage it to set up a separate
board. The FAF has set up a trustee working group to study the issue.
“Ninety-nine percent of the letters
from the privately held company con-
stituency demanded that the Financial
Accounting Foundation create differential
standards for privately held companies,”
Melancon said. “We’ve studied this prob-
lem for far too long.”
The AICPA has even provided a kind
of toolkit on its Web site to help mem-
bers write letters to the FAF in support of
a private company board.
By Michael cohn / nor Walk, conn.
The Financial Accounting Standards Board
has added a new project to its crowded agenda: the impairment of intangible assets with
The new project has been added by FASB
chair Leslie Seidman in response to feedback
that the board had received on another of its
projects, its proposed standards for goodwill
impairment (see page 51).
FaSB adds intangible assets project to agenda
The new project is intended to be a short-term project with the narrow scope of simplifying the manner in which an entity tests
other indefinite-lived intangible assets for
impairment. However, FASB did not provide
a timeline for completion of the new project
or how it would fit into the goodwill impairment project.
Separately, FASB received feedback on an-
other of its projects, for insurance contracts,
from an insurance industry association, the
Group of North American Insurance Enter-
prises, urging it to make substantial changes
in its proposed standards. The insurance in-
dustry group asked FASB to consider creating
separate models for short-duration non-life
insurance contracts and another for long-
duration life insurance contracts. AT
PWC AND CROWE SUED OVER
COLONIAL BANK AUDITS
NEW YORK — PricewaterhouseCoopers
and Crowe Horwath have been sued over
their audits of Colonial Bancgroup by the
bankrupt bank’s trustee.
The bank, formerly headquartered in
Montgomery, Ala., failed in 2009 after
it disclosed that it had bought over $1
billion in troubled mortgages from mort-gage-lending firm Taylor Bean & Whitaker that Taylor Bean did not actually own.
The bank’s deposits were subsequently
sold to BB&T Corp. by the Federal Deposit Insurance Corp.
The complaint against the bank’s two
former auditing firms charges them with
accounting malpractice and professional
negligence for not detecting the fraud.
The two firms were also sued for breach
of contract. The complaint accused the
firms of violating generally accepted
auditing standards while the fraud lasted
from 2002 to 2009.
PwC spokesman Christopher Atkins
declined to comment. “It’s our policy not
to discuss matters in litigation,” he said.
Crowe Horwath disputed the claims in