Back in November 2013, we talked about the Designation of Accountant requirements. Well, effective June 1, 2014 there was an amendment to SEC Rule 17a-5(f)(2). As such, all Broker/Dealers must file a NEW Designation of Accountant form. FINRA has recently announced that there is a new electronic form, which will be available on the FINRA Gateway as of November 24, 2014. As in the past, this form is due by the 10th of the December (for fiscal year end December firms). All Broker/Dealers are required to file a new form, regardless of whether or not you have changed auditors, or if your audit engagement is continuous in nature. So, be sure to remind your FINOP to mark their calendars for the period 11/24 – 12/10, as they will have 16 days to file the new form. Again, a reminder that you should make sure your audit engagement letters have language in them stating that the agreement is of a continuing nature, providing for successive engagements. This will allow you to avoid having to file a new Designation of Accountant form each year, and does not preclude the annual renegotiation of fees and terms. Of course should you decide to change auditors, you will be required to file a Replacement of Accountant under Rule 17a-5(f)(3).
In accordance with the amended SEC Rule 17a-5(d),Broker/Dealer’s are now required to file annually either a compliance report or an exemption report. If your firm did not claim an exemption from Rule 15c3-3 (carrying brokers) for part or all of the year, you are required to file a compliance report. The compliance report must include statements as to whether the firm established and maintained internal control over compliance, if such controls were effective, if the firm was in compliance with SEC Rule 15c3-1 and paragraph (e) of Rule 15c3-3 for the most recent year. If there were material weaknesses, the firm must identify each weakness, and also disclose any non-compliance with 15c3-1 and paragraph (e) of 15c3-3. If your firm did claim exemption from Rule 15c3-3 for the most recent year, you are required to file a compliance report. The exemption report requires 3 straightforward statements in response to the following: 1) What exemption did the firm claim during the most recent year, 2) Did the firm meet the exemptive provisions, and were they without exception, 3) if there were any exceptions, what were they. While this amendment is new and has no precedent or real guidance, the requirements are clear (especially for those firms required to prepare and file an exemption report). Of course, auditors of Broker/Dealers are required, under PCAOB Attestation Standard No. 2 to review the compliance and exemption reports prepared by a Broker/Dealer (see http://pcaobus.org/Standards/Attestation/Pages/AT2.aspx).
Unlike most accountants, busy season for FINOP’s and Broker/Dealer accountants does not coincide with tax season. Rather, it relates to the regulatory requirement to submit annual audited financial statements within 60 days of the Firm’s fiscal year end. As such, January and February are our busy seasons, where we are closing the month of December, the 4th quarter, and the year as a whole. Audit requests start as early as October of the previous year, but most of the heavy lifting comes in January and February.
It used to be different. The auditors did it all. They prepared their own schedules, wrote the reports, wrote the footnotes, completed the checklists, edited it all, and handed you a nice tidy package. Heck, they even used to send the reports out to the regulators. Like a lot of things, times have changed.
In 2002, by way of Congress, the PCAOB (Public Company Accounting Oversight Board) was created, as part of the Sarbanes-Oxley Act (thank you Enron, thank you Bernie Madoff…). For the first time ever, auditors of U.S. public companies (oh, and Broker/Dealers) were to be subject to independent external oversight. Mind you, prior to that, the auditing world was self-regulated.
Well 10+ years after the establishment of the PCAOB, the screws have been tightened on B/D audits. After 2012 audits, the PCAOB did a sample review of B/D audits and found that all of them lacked the required independence and did not meet many of the standards set forth. As such, auditing firms were read the riot act, and told they better shape up, or their audits were going to be rendered worthless.
Fast forward to today. Here we are dealing with the fallout, which goes something like this:
The auditors need to charge more money because they have to do more work to ensure they are in PCAOB compliance BUT, they can’t prepare supporting schedules, they can’t prepare the audit report, they can’t prepare the footnotes, they can’t prepare the disclosure checklists, they can’t edit the report, they can’t bind the report, and of course they can’t send out the report. So, the B/D’s of which the majority don’t have internal resources to handle this have to rely on their limited resources and their outsourced resources to do all of this work…which their auditors, who have the expertise, used to do. Oh, and that’s going to cost more money. The auditors are in CYA mode…and the management rep letter that used to be 1 page is now 7!
So now, you have a B/D that contends with more and more regulation each year, smaller and smaller margins/fees, more demanding reps and employees, and they have to pay their auditors and consultants more money to get a document that typically verifies what they already know…that their books and records are just fine.
There are plenty of reasons I believe that a lot of this makes no sense, and that small B/D’s should probably not be subject to PCAOB standards (or at least not full blown standards). Auditors are required to express an opinion on the financial statements they audit, but then they are required to turn over that opinion to the B/D, who will include it with their financials and submit it to the regulators. How does the auditor know that their opinion letter is going on the financials they audited if they aren’t allowed to bind the financials? Auditors can’t write footnotes, but they are the GAAP experts. This is what they do best.
If you take a step back, the independent audit is just an over-regulated process that can cost a B/D, particularly a small B/D a lot of time, money, and heartache. The SEC and FINRA are regulating the industry and they regularly audit B/D’s. Why not just have them finish the job, and provide an opinion on the financial statements? If that is not where this is all headed, than I have another prediction – the independent accounting firms are eventually going to have to be paid out of a PCAOB fund. It’s never really made sense to me how a B/D can pay for an independent audit and expect to really get an independent audit. Where does the accounting firm’s interests lie? In getting paid! If you have a disgruntled B/D, they are going to lay into their service provider – the auditors, and the auditors then have the choice of pissing off their client or strictly complying with regulation.
At the end of the day, and at the end of a very grueling busy season, we have a flawed system. A system, that ultimately is supposed to be designed to protect the investor…to protect the clients of the B/D. There’s got to be a better way!
As a reminder, in February 2014, FINRA will switch its banking services to a new bank. As part of this transition, FINRA will simplify the methods firms use to make payments to them. FINRA will consolidate all check payment addresses, with the exception of GASB payments, into a single payment address. This change will allow for a more efficient check payment and deposit process. Second, to ensure your firm’s payments are applied to the correct invoice in a timely manner, firms must include invoice numbers on all check remittances, and include it as the reference number on ACH and wire payments. Note: If a firm submits a payment without an invoice number, FINRA will apply the funds to the firm’s FINRA Flex-Funding account, which is accessible via E-Bill. Someone at your firm must then transfer the funds to the appropriate invoice in order for the invoice to be closed. Starting in February,you must use the following information to make payments to FINRA. Mailing Address To mail a check to FINRA, include the invoice number on the check and mail the payment to: All payments (except GASB payments) Bank of America Lockbox Services FINRA 418911 MA5-527-02-07 2 Morrissey Blvd.
As per SEC Rule 172-5(f)(2): Every broker or dealer that is required to file an annual report of financial statements section shall file no later than December 10 of each year a statement with the Commission’s principal office in Washington, DC, the regional office of the Commission for the region in which its principal place of business is located, and the principal office of the designated examining authority for such broker or dealer. Such statement shall indicate the existence of an agreement dated no later than December first, with an independent public accountant covering a contractual commitment to conduct the broker’s or dealer’s annual audit during the following calendar year. (ii) The agreement may be of a continuing nature, providing for successive yearly audits, in which case no further filing is required. If the agreement is for a single audit, or if the continuing agreement previously filed has been terminated or amended, a new statement must be filed by the required date.In summary, you must have an executed engagement letter for your annual independent audits (which must be conducted by a PCAOB approved CPA firm) by December 1st, and if your engagement letter does not have language stating that it is of a continuing nature, providing for successive yearly audits.
We recently sent out the following cover letter to our clients, along with a .pdf summary. If you would like to receive a copy of our rule amendments summary, please contact us! To our valued clients: On August 21, 2013, The Federal Register published the Final Rule of the SEC on their adoption of amendments to the net capital, customer protection, books and records, and notification rules for broker-dealers operating under the Securities and Exchange Act of 1934. The SEC issued two releases relating to these Rule amendments. Each release was over 300 pages. In the interest of our clients, we have attempted to summarize these amendments as succinctly and accurately as possible, with a focus on those items that are most likely to impact our clients. After each rule summary we include a “Maven Takeaway” – our topside interpretation of the rule change (if you read nothing else, read these). We encourage questions, challenges, and further review of published documentation.
Welcome to our new and improved website. We are very excited to launch the site concurrent with the roll-out of our new company logo.Our hopes are that the site provides a clean concise conveyance of information and resources for our clients and prospects.Additionally, current clients have the ability to log directly into their books and records portal at the top right-hand corner of the site. If you have any questions or comments about our new website, please feel free to contact us.
The new Form Custody is now available through FINRA’s Firm Gateway. Form Custody is a new filing requirement for all broker/dealers to submit on a quarterly basis, coinciding with FOCUS filings. There is no exemption from this filing! Its purpose is to gather information about the B/D’s practices with respect to the custody of securities and funds of customers and non-customers. The form is not required to be audited. The requirement to file Form Custody was created through an amendment to SEC Rule 17a-5. The first Form Custody is due on January 27,2014, for the period October 1,2013 through December 31,2013. For more information on Form Custody,see SEC Release No. 34-70073.