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1666 K Street, NWWashington, D.C. 20006Telephone: (202) 207-9100Facsimile: (202) GEMENTS RELATED TO BROKER ANDDEALERCOMPLIANCEOREXEMPTIONREPORTS REQUIRED BY THE U.S. SECURITIESAND EXCHANGE COMMISSIONAND TOPCAOB))))))))))))PCAOB Release No. 2013-007October 10, 2013PCAOB RulemakingDocket Matter No. 035After public comment, the Public Company Accounting Oversight Board("PCAOB" or the "Board") is adopting two new attestation standards,Examination Engagements Regarding Compliance Reports of Brokers andDealers, and Review Engagements Regarding Exemption Reports ofBrokers and Dealers. The Board is also adopting related amendments tocertain PCAOB standards. The attestation standards and relatedamendments will be applicable to all registered firms conductingattestation engagements related to broker and dealer compliance orexemption reports required by the U.S. Securities and ExchangeCommission ("SEC" or 07-9134,wilsonk@pcaobus.org), Barbara Vanich, Associate Chief Auditor(202/207-9363, vanichb@pcaobus.org), and Nicholas Grillo, AssistantChief Auditor (202/207-9104, grillon@pcaobus.org).IntroductionOn July 30, 2013, the SEC adopted amendments to Rule 17a-51/ under theSecurities Exchange Act of 1934 ("Exchange Act") to strengthen and clarify broker anddealer annual financial reporting requirements and also facilitate the ability of the1/See Rule 17a-5, 17 C.F.R. § 240.17a-5 ("SEC Rule 17a-5") and SECExchange Act Release No. 34-70073, Broker-Dealer Reports (July 30, 2013), 78Federal Register 51910 (August 21, 2013) ("SEC Release"), available .
PCAOB Release No. 2013-007October 10, 2013Page 2PCAOB to implement the oversight of independent public accountants of brokers2/ anddealers3/ provided by Section 982 of the Dodd-Frank Wall Street Reform and ConsumerProtection Act (the "Dodd-Frank Act").4/The Board is adopting two attestation standards, Examination EngagementsRegarding Compliance Reports of Brokers and Dealers (the "examination standard")and Review Engagements Regarding Exemption Reports of Brokers and Dealers (the"review standard") (collectively, the "attestation standards"). These attestation standardswill apply to examination engagements regarding compliance reports of brokers anddealers ("examination engagements") and review engagements regarding exemptionreports of brokers and dealers ("review engagements"), pursuant to requirementscontained in SEC Rule 17a-5.5/ Pursuant to SEC Rule 17a-5, the audits of brokers anddealers, including the attestation engagements covered by this release, are required tobe performed under PCAOB standards.6/ Before these amendments to SEC Rule 17a-5,audits of brokers and dealers were required to be performed under generally acceptedauditing standards ("GAAS") established by the American Institute of Certified PublicAccountants ("AICPA"). The attestation standards will be effective, subject to approvalby the SEC, for examination engagements and review engagements for fiscal yearsending on or after June 1, 2014. This effective date would coincide with the effectivedate for the corresponding amendments to SEC Rule 17a-5.2/According to PCAOB Rule 1001(b)(iii), the term "broker" means a broker(as defined in Section 3(a)(4) of the Exchange Act) that is required to file a balancesheet, income statement, or other financial statement under Section 17(e)(1)(A) of thatAct, where such balance sheet, income statement, or financial statement is required tobe certified by a registered public accounting firm.3/According to PCAOB Rule 1001(d)(iii), the term "dealer" means a dealer(as defined in Section 3(a)(5) of the Exchange Act) that is required to file a balancesheet, income statement, or other financial statement under Section 17(e)(1)(A) of thatAct, where such balance sheet, income statement, or financial statement is required tobe certified by a registered public accounting firm.4/Pub. L. No. 111-203, 124 Stat. 1376 (2010).5/See paragraphs (g)(2)(i) and (ii) of SEC Rule 17a-5.6/See paragraph (g) of SEC Rule 17a-5.
PCAOB Release No. 2013-007October 10, 2013Page 3II.BackgroundSections 17(a) and (e) of the Exchange Act and SEC Rule 17a-5 togethergenerally require a broker or dealer to, among other things, file an annual report7/ withthe SEC and the broker's or dealer's designated examining authority ("DEA").8/ SECRule 17a-5 requires the annual report to contain, among other things:a.A financial report consisting of audited financial statements and supportingschedules;9/ andb.A compliance report or an exemption report.10/The requirements for the compliance report and the exemption report are newrequirements that are the result of the Commission's amendments to SEC Rule 17a-5.According to the SEC, these reports contain information regarding broker and dealercompliance with key SEC financial responsibility rules11/ that enhance the ability of the7/Paragraph (d) of SEC Rule 17a-5 contains general requirements forannual reports to be filed by SEC-registered brokers and dealers. Paragraphs (d)(1)(iii)and (iv) of SEC Rule 17a-5 provide certain limited exceptions to the requirement to filean annual report.8/Under SEC Rule 17d-1, 17 C.F.R. § 240. 17d-1, a registered broker ordealer that is a member of more than one securities self-regulatory organization may beassigned a "designated examining authority" or "DEA" that is responsible for examiningthe broker or dealer for compliance with SEC financial responsibility rules. An exampleof a securities self-regulatory organization that is a designated examining authority isthe Financial Industry Regulatory Authority.9/See paragraph (d)(2) of SEC Rule 17a-5. Auditing Standard No. 17,Auditing Supplemental Information Accompanying Audited Financial Statements(PCAOB Release No. 2013-008) (October 10, 2013), applies to the audit proceduresperformed and the audit report on supporting schedules.10/See paragraphs (d)(3) and (4) of SEC Rule 17a-5. The attestationstandard in Appendix 1 of this release applies to an examination of certain statementsmade by the broker or dealer in the compliance report. The attestation standard inAppendix 2 of this release applies to a review of the statements made by the broker ordealer in the exemption report.11/The SEC Release used the term "financial responsibility rules" to refer to:17 C.F.R. § 240.15c3-1 ("SEC Rule 15c3-1" or the "net capital rule"); 17 C.F.R. §240.15c3-3 ("SEC Rule 15c3-3"); 17 C.F.R. § 240.17a-13 ("SEC Rule 17a-13"); and any
PCAOB Release No. 2013-007October 10, 2013Page 4SEC to oversee the financial responsibility practices of registered brokers and dealersand, in particular, the safekeeping of customer assets.Generally, SEC Rule 17a-5 provides that brokers or dealers that did not claim anexemption from SEC Rule 15c3-3 throughout the most recent fiscal year must prepareand file the compliance report. A broker or dealer must prepare and file the exemptionreport if the broker or dealer did claim that it was exempt from SEC Rule 15c3-3throughout the most recent fiscal year.Brokers and dealers also must generally file reports prepared by a PCAOBregistered independent public accountant covering the financial report and thecompliance report or exemption report, as applicable.12/The auditor's examination report or review report would replace the priorrequirement in SEC Rule 17a-5 that the auditor report on material inadequaciesidentified in the broker's or dealer's accounting system, internal accounting controls,procedures of the broker or dealer for safeguarding securities, and certain practices andprocedures related to customer protection and securities.III.Considerations in Adopting the Attestation StandardsThe Board is adopting the attestation standards to establish requirements alignedwith the auditor's responsibilities under SEC Rule 17a-5.13/ Specifically, the attestationstandards establish requirements for examining certain statements in a broker's ordealer's compliance report and reviewing a broker's or dealer's statements in anexemption report. The Board is also adopting related amendments to certain PCAOBstandards, including amendments regarding documentation and amendments to requireengagement quality reviews of the examination and the review engagements.14/rule of the DEA of the broker or dealer that requires account statements to be sent tothe customers of the broker or dealer (an "account statement rule"). See the SECRelease at 8-9. The terms "financial responsibility rules" and "account statement rule"have the same meaning in these standards as they have in the SEC Release.12/See paragraph (d)(1)(i)(C) of SEC Rule 17a-5.13/See paragraphs (g) and (h) of SEC Rule 17a-5.14/In addition, on February 28, 2012, the Board proposed to update certain ofits rules to conform to the Dodd-Frank Act amendments to the Sarbanes-Oxley Act of2002. See Proposed Amendments to Conform the Board's Rules and Forms to theDodd-Frank Act and Make Certain Updates and Clarifications, PCAOB Release No.
PCAOB Release No. 2013-007October 10, 2013Page 5The attestation standards for the examination and review engagements, includedin appendices 1 and 2 of this release, represent stand-alone standards that are basedon existing concepts and principles in the existing attestation standards but are tailoredfor the specific requirements under SEC Rule 17a-5.15/In general, both standards set forth a framework of specific procedures that arerequired for auditors to opine or conclude on a broker's or dealer's statements – referredto in the standards as "assertions"16/ – in compliance reports and exemption reportsrequired by SEC Rule 17a-5, respectively.17/Furthermore, both of the attestation standards emphasize coordination betweenthe examination engagement or review engagement, the audit of the broker's or dealer'sfinancial statements and audit procedures performed on the supporting schedules(referred to in this release as "supplemental information"). This emphasis oncoordination, when properly executed, can promote overall audit effectiveness andavoid redundancy in the work performed. For example, auditors can take into account,when appropriate, evidence obtained while planning and performing the audit of the2012-002 (February 28, 2012). Among other things, these proposed amendments wouldamend the Board's rules to require that registered firms comply with the Board's interimstandards in broker or dealer engagements. See proposed amendments to Rule1001(a)(v), Rule 1001(a)(vi), Rule 3200T, and Rule 3300T, Rule 3400T, Rule 3500T,and Rule 3600T. The Board expects to act on these proposed amendments in aseparate rulemaking in the near future.15/The requirements in the examination standard are generally consistentwith the requirements of AT sec. 101, Attest Engagements, and AT sec. 601,Compliance Attestation. Similarly, the requirements in the review standard are generallyconsistent with AT sec. 101. However, when an auditor performs an engagementpursuant to the examination standard or a review pursuant to the review standard, ATsec. 101 and AT sec. 601 would not apply.16/These standards use the term "assertion" to refer to the broker's ordealer's individual statements that are covered by the examination and review. In theexamination standard, the term "assertion" also distinguishes the portion of thestatements in the broker's or dealer's compliance report that are covered by theexamination.17/See paragraphs (i)(3)(iii)(A) and (B) of SEC Rule 17a-5 for the specificrequirement for an opinion or conclusion to be expressed in the auditor's report.
PCAOB Release No. 2013-007October 10, 2013Page 6financial statements and the audit procedures performed on supplemental information inplanning and performing the attestation engagement.This emphasis on coordination is also a key aspect of Auditing Standard No. 17,Auditing Supplemental Information Accompanying Audited Financial Statements (the"auditing standard"),18/ which the Board is separately adopting. Auditing Standard No.17 will apply when the auditor of the financial statements is engaged to perform auditprocedures and report on supplemental information accompanying audited financialstatements in accordance with PCAOB standards, including supporting schedulesprepared pursuant to SEC Rule 17a-5.19/ The auditing standard also includesrequirements for the procedures on the supplemental information to be planned andperformed in conjunction with the audit of the financial statements, and for the audits ofbrokers and dealers to be coordinated with the attestation engagements related tocompliance or exemption reports.20/In the Board's view, the attestation standards further the public interest andpromote investor protection because they are tailored to the correspondingrequirements of SEC Rule 17a-5, which are designed to provide safeguards withrespect to broker and dealer custody of customer securities and funds. For example, thespecific requirements in the examination standard for evaluating Internal Control OverCompliance21/ can help auditors to identify deficiencies in a broker's or dealer's internalcontrols for safeguarding customer securities and funds or maintaining necessarycapital or reserves. Similarly, the specific requirements in the review standard shouldfocus auditors on whether the broker or dealer appropriately meets the exemptionprovisions in paragraph (k) of SEC Rule 15c3-3.18/See Auditing Standard No. 17, Auditing Supplemental InformationAccompanying Audited Financial Statements, PCAOB Release No. 2013-008 (October10, 2013).19/See paragraph (d)(2) of SEC Rule 17a-5.20/See the note to paragraph 3.c. of Auditing Standard No. 17.21/Consistent with SEC Rule 17a-5, the examination standard defines"Internal Control Over Compliance" as "internal controls that have the objective ofproviding the broker or dealer with reasonable assurance that non-compliance with the[financial responsibility rules], will be prevented or detected on a timely basis." Seeparagraph (d)(3)(ii) of SEC Rule 17a-5.
PCAOB Release No. 2013-007October 10, 2013Page 7Also, the SEC Release states that SEC enforcement actions alleging fraudulentconduct by brokers and dealers highlight the need for enhancements to the rulesgoverning broker and dealer custody of customer assets, including increased focus oncompliance and internal compliance controls by brokers and dealers and theirauditors.22/ The attestation standards include requirements related to the auditor'sconsideration of fraud risks, including the risk of misappropriation of customer assets.The new standard includes requirements for testing controls of the broker or dealer forsafeguarding customer assets and funds and for performing procedures to obtainevidence about the existence of customer funds and securities held for customers.Furthermore, PCAOB inspections staff in their inspections of broker and dealeraudits have identified auditing deficiencies in 57 of 60 audits that were conducted underGAAS and the prior SEC Rule 17a-5.23/ The attestation standards – tailored for the newaudit and reporting requirements under SEC Rule 17a-5 – establish an approachspecific to examining compliance reports and reviewing exemption reports that shouldprovide greater clarity as to the procedures that should be used and facilitate consistentcompliance for auditors of SEC registered brokers and dealers.The financial responsibility rules serve an important investor protection functionby requiring brokers and dealers to maintain minimum levels of net capital and takesteps to safeguard customer securities and cash.24/ As described in the SEC Release,the new requirements for engagement of accountants should result in higher levels ofcompliance with the financial responsibility rules by increasing the focus of carryingbrokers and dealers and their independent public accountants on specific statementsmade in compliance reports and increasing the focus of non-carrying brokers anddealers and their independent public accountants regarding whether the broker ordealer meets applicable exemption provisions.25/ Moreover, in the Board's view, theinvolvement of auditors, under the attestation standards and PCAOB oversight, shouldenhance the quality of the compliance information provided to the SEC and used in itsregulatory oversight, which is important to the protection of investors who entrust theircash and securities with brokers and dealers.22/See the SEC Release at 206-207.23/See Second Report on the Progress of the Interim Inspection ProgramRelated to Audits of Brokers and Dealers, PCAOB Release No. 2013-006 (August 19,2013) at 6.24/See the SEC Release at 255.25/See the SEC Release at 238.
PCAOB Release No. 2013-007October 10, 2013Page 8A.Consideration of Comments ReceivedIn developing the attestation standards, the Board also considered commentsreceived. On July 12, 2011, the Board proposed two attestation standards, ExaminationEngagements Regarding Compliance Reports of Brokers and Dealers ("proposedexamination standard"), and Review Engagements Regarding Exemption Reports ofBrokers and Dealers ("proposed review standard") (collectively, the "proposedattestation standards") and related amendments to PCAOB standards. The proposedattestation standards were developed to align the standards of the PCAOB with theSEC's 2011 proposed amendments to SEC Rule 17a-5 ("SEC Proposed Rule 17a5"),26/ which included requirements for brokers and dealers to engage auditors toperform either a compliance examination engagement or review engagement,whichever would be required pursuant to the SEC's proposed amendments.The Board received eleven comment letters on the proposed attestationstandards. Commenters generally were supportive of the Board's efforts to draftattestation standards applicable to brokers and dealers and the Board's efforts to alignthe attestation standards with the Commission's proposed amendments to SEC Rule17a-5. Commenters provided observations and comments on certain requirements andother specific aspects of the attestation standards and related amendments to PCAOBstandards. Many of the significant comments, which dealt with the meaning of the term"material non-compliance" in the context of the auditor's examination of the broker's ordealer's assertions in the compliance report, are no longer applicable because ofsubsequent changes made by the SEC in its adoption of final amendments to SEC Rule17a-5. The Board did, however, revise the attestation standards in response to certainof the comments received. Also, the Board made revisions to the standards in view ofthe final requirements contained in the SEC's amendments. Such changes are intendedto align the Board's attestation standards with the SEC's requirements. Section IV belowsummarizes the key points and changes made to the attestation standards. Appendix 4discusses the significant comments received on the proposed attestation standards ingreater detail, as well as the revisions to the attestation standards.26/See SEC Exchange Act Release No. 34-64676, Broker-Dealer Reports(June 15, 2011), 76 Federal Register 37572 (June 27, 2011).
PCAOB Release No. 2013-007October 10, 2013Page 9IV.Overview of the Attestation StandardsA.Attestation Standard No. 1, ExaminationCompliance Reports of Brokers and DealersEngagementsRegardingThe examination standard, which is presented in Appendix 1, establishesrequirements for the auditor with respect to the auditor's examination regarding abroker's or dealer's compliance report. Consistent with SEC Rule 17a-5, theexamination standard requires auditors to obtain sufficient appropriate evidence toopine on a broker's or dealer's statements in its compliance report as to whether: The Internal Control Over Compliance of the broker or dealer waseffective during the most recent fiscal year; The I
PCAOB Release No. 2013-007 October 10, 2013 Page 3 II. Background Sections 17(a) and (e) of the Exchange Act and SEC Rule 17a-5 together generally require a broker or dealer to, among other things, file an annual report7/ with the SEC and the broker's or dealer's designated examining authority ("DEA").8/ SEC Rule 17a-5 r
