Accounting Board Faults Audits of Brokerage Firms

The following is an excerpt from an article in 

The New York Times
Tuesday, August 21, 2012

Accounting Board Faults Audits of Brokerage Firms

By FLOYD NORRIS

The many auditors who inspect the financial statements of brokerage firms appear to be cutting corners and not doing all the work they should do, a worrisome sign after the collapse of the Peregrine Financial Group, a leading commodities brokerage firm, where a fraud had gone undetected for many years.

Having completed the first review of such brokerage firm audits, the Public Company Accounting Oversight Board said on Monday that it had found deficiencies in every audit its inspectors reviewed.

“The auditors,” said Jeanette M. Franzel, a member of the board, “were not properly fulfilling their responsibilities to provide an independent check on brokers’ and dealers’ financial reporting and compliance with S.E.C. rules.”

That does not mean that any of the statements misrepresented the financial conditions of the 23 brokerage firms whose audits were reviewed by inspectors from the board. In most cases, the accounting board concluded that the audit firm had failed to do the necessary work to ensure that the financial statements were accurate or that the firms had sufficient capital.

“In 13 of the 23 audits,” the board reported, auditors “did not perform sufficient procedures to identify, assess and respond to the risks of material misstatement of the financial statements due to fraud.”

Lynn Turner, a former chief accountant of the Securities and Exchange Commission, called the report “mind-boggling” and said it indicated that audit firms had failed to respond to the disclosure of Bernard Madoff’s Ponzi scheme. It was that fraud that led Congress to authorize the oversight board to review audits of brokerage firms.

The Peregrine fraud was uncovered after the National Futures Association, a self-regulator, stopped relying on paper copies of bank records in its own inspections. Peregrine had forged such records for years. Its independent auditor, a one-person firm, did not discover the fraud even though bank accounts are supposed to be confirmed.

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