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!