Many auditors of broker-dealers are not being as diligent in their audits as they should be. The Public Company Accounting Oversight Board said it had found deficiencies in every audit it had reviewed.
This is the first review of such audits and the findings are particularly troublesome in light of the recent Peregrine Financial Group commodities firm fraud.
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Peregrine’s fraud functioned without detection for years. And in the audits reviewed by the Board, it was clear auditors were not fulfilling their responsibilities to conduct an unbiased review of whether firms are in compliance with SEC rules and reporting requirements.
The statements audited did not misrepresent the financial condition of the firms. But there was insufficient effort to identify, assess, and respond to material misstatements of firms’ financial conditions relevant to fraud.
The findings were mind boggling from the perspective that auditors have failed to respond to the disclosure of Bernard Madoff’s Ponzi scheme. Even in the case of Peregrine, an auditor did not uncover the fraud despite the fact that bank statements and accounts are supposed to be confirmed during the course of an audit.
One particular area of concern is whether broker-dealers are subject to consumer protection rules that specify how firms can use customer money and whether the broker-dealers have stayed within those limits.
The Board was created by the Sarbanes-Oxley Act and was originally authorized to audit
the work of only a few audit firms. Dodd-Frank changed that based on the revelation of Madoff’s Ponzi scheme.