The Public Company Accounting Oversight Board (PCAOB) has released its 2024 Annual Report on the Interim Inspection Program for audits of broker-dealers. This 10th annual report outlines persistent deficiencies in broker-dealer audits and attestation engagements. For management and audit committees, the report offers crucial insights into audit risks, regulatory expectations, and areas where stronger oversight is needed.
Persistent deficiencies raise oversight red flags
In 2024, the PCAOB inspected 60 accounting firms and reviewed 102 audits of broker-dealer financial statements. The PCAOB also examined 93 related attestation engagements—either examinations of compliance reports or reviews of exemption reports. The results were:
- 66% of broker-dealer audits had at least one deficiency related to audit evidence.
- 59% of compliance examinations and 42% of exemption reviews were found deficient.
- Deficiencies were most prevalent among smaller firms that audit fewer broker-dealers or issuers.
These statistics reflect a growing concern about audit quality in the broker-dealer space—and highlight where management and audit committees should be particularly vigilant.
Key areas of concern identified
1. Revenue recognition and accuracy
Deficiencies in auditing revenue were the most common and serious. This is nothing new, as revenue had been the area cited with the most deficiencies in the 2023 and 2022 reports as well. Of the 102 audits reviewed, 97 included revenue testing—nearly half (48%) had deficiencies.
Common problems included failure to:
- Verify the accuracy of commissions, advisory fees, 12b-1 fees, and merger/acquisition fees.
- Confirm that performance obligations were distinct and satisfied prior to revenue recognition (as required by ASC 606).
- Disaggregate revenue sources appropriately to reflect their nature and timing.
- Assess the classification and disclosure of revenue, including required qualitative information.
- Test the accuracy and completeness of third-party reports (e.g., clearing broker data) used in audit procedures.
For example, some firms did not test whether securities trade amounts and commission rates were accurate, nor did they evaluate whether revenue from variable annuity trails or 12b-1 fees should have been disaggregated. Others did not ensure advisory fee calculations were tied to accurate Assets Under Management (AUM) data or fee schedules.
Takeaway for management and audit committees:
Audit committees should confirm that revenue processes—including fee calculation, classification, and third-party data use—are well-documented and transparent. Management should ensure contracts and performance obligations are clearly delineated and that disclosures meet ASC 606 requirements. An ASC 606 practice aid, which walks management through the five-step revenue recognition process, can be useful to take inventory of the broker-dealer’s various contracts and how revenue from those contracts should be recognized in the financial statements. Such a practice aid can also prove useful in crafting ASC 606 disclosures.
2. Journal entry testing and fraud risk
Deficiencies in journal entry testing—critical for identifying and responding to fraud risk—were found in 18% of audits.
Common issues included:
- Failing to test the completeness of journal entry populations
- Selecting entries without considering fraud risk characteristics
- Reviewing listings but not examining supporting documentation
- Excluding flagged entries from testing without documented rationale
- Testing too few entries to provide sufficient audit assurance
The PCAOB specifically noted that many auditors failed to respond appropriately to the risk of management override of controls—a key component of fraud risk under PCAOB standards.
Takeaway for management and audit committees:
Ensure your auditors are applying rigorous, risk-based journal entry testing and that internal finance and compliance teams are involved in identifying and monitoring manual entries, especially at period end. Make sure that supporting documentation is retained for all posted journal entries. Also, ensure the journal entry posting process is clearly documented, including the types of journal entries that can be posted, by whom, and who the designated reviewer is. Having such a process clearly documented will make it easier for auditors to understand your broker-dealer’s journal entry process, which is a critical first step in effective journal entry testing.
3. Related party relationships and transactions
Deficiencies in this area were particularly concerning given the potential for misstatement or hidden liabilities. The PCAOB found that some auditors:
- Did not test allocations of revenues and expenses between broker-dealers and affiliates
- Failed to assess the financial capability of affiliates to cover material receivables
- Missed required disclosures of related party transactions under ASC 850
In one case, auditors accepted related-party expense allocations without verifying whether they were accurate, complete, or consistent with underlying agreements.
Takeaway for management and audit committees:
Ensure formal agreements with affiliates are in place and that intercompany transactions are reviewed regularly. If changes to related party transactions are made, these changes should be formally documented in the form of agreement amendments. If an allocation methodology, such as headcount or time studies, is used, broker-dealers must ensure this allocation methodology is thoroughly documented and followed. Disclosures about related parties must be clear and complete. Committees should confirm that auditors are probing related party risks—not just accepting management’s assertions.
Key areas of concern identified – examination engagements (compliance reports)
Of the 29 examination engagements reviewed, 59% had at least one deficiency. Common issues included:
- Incomplete testing of controls over compliance with SEC financial responsibility rules (e.g., the Net Capital Rule, Customer Protection Rule)
- Failure to evaluate the design and operation of controls with a review component (e.g., how management reviews reserve computations or account statements)
- Insufficient testing of IT general controls upon which other control procedures depended
- Lack of compliance testing over reserve account balances and the existence of securities held for customers
- Improper or missing representation letters from broker-dealer management
- Failure to issue modified opinions when material weaknesses in internal control over compliance (ICOC) existed
Takeaway for management and audit committees:
Engage in proactive conversations with your auditor about the internal controls they expect to see in place over the financial responsibility rules. Gain an understanding of your auditor’s testing approach, ensuring it aligns with the expectations of the PCAOB. Throughout the year, make sure sufficient documentation is retained so your auditor can easily test ICOC. Again, what is deemed sufficient should be determined through proactive conversations with your auditor.
Key areas of concern identified – review engagements (exemption reports)
Among the 64 review engagements evaluated, 42% had deficiencies. Key failures included:
- Inadequate understanding of the broker-dealer's exemption under Rule 15c3-3
- Insufficient inquiry into controls or monitoring practices related to exemption compliance
- Failure to test or inquire about the handling of customer checks to ensure prompt transmittal
- Errors or omissions in review reports—such as referencing assertions not made or failing to include required language
Takeaway for management and audit committees:
If your broker-dealer claims an exemption, ensure operational practices support that status. Review internal monitoring processes and make sure what is happening in practice aligns with your written supervisory procedures. If exceptions to your exemption status are identified, ensure they are promptly corrected and that your auditor is notified of the exception.
What you can do now
To help improve the quality of oversight:
- Engage in proactive dialogue with your auditor about the PCAOB’s findings and how they apply to your engagement.
- Assess your auditor’s broker-dealer experience—particularly if your firm is served by a smaller firm.
- Re-examine and test your internal controls over customer protection, capital computations, revenue recognition, and related-party arrangements.
- Strengthen audit committee oversight by requesting clear audit strategies, better documentation, and enhanced reporting on high-risk areas like revenue and related parties.
- Confirm that required auditor communications are received and appropriately documented.
Final thought
The PCAOB’s report is a call to action—not just for auditors, but for management and those charged with governance. As regulatory expectations continue to rise, management and audit committees must ensure that internal processes, control environments, and auditor relationships are all aligned to support accurate, transparent, and compliant financial reporting.
About BerryDunn
BerryDunn's financial services team understands the complex regulatory environment that broker-dealers operate in and provides practical solutions to help you stay ahead of requirements. From broker-dealer financial statement audits to tax preparation and compliance to consulting services, we tailor our services to meet your unique needs. Learn more about our team and services.
Skip to Main Content