PCAOB Issues Guidance on Registration of Broker-Dealer Auditors

The PCAOB’s Division of Registration and Inspections has issued guidance on the registration of broker-dealer auditors. The Sarbanes-Oxley Act requires that every registered broker or dealer must annually file with the SEC certain financial statements that are certified by a firm that is registered with the PCAOB. The SEC had provided relief from that requirement to nonpublic broker-dealers, but the relief has expired. Financial statements of nonpublic broker-dealers for fiscal years ending after December 31, 2008 must now be certified by a registered public accounting firm.

The PCAOB’s guidance describes how to register and the fees associated with registration. A firm that did not audit any issuers in the previous calendar year will pay a nonrefundable registration fee of $250.

Nonpublic broker-dealers are not considered issuers under the Sarbanes-Oxley Act. The Board does not conduct inspections or enforce the applicable standards for the audits of entities that are not issuers. The SEC has issued guidance advising that PCAOB registration does not affect its requirement that the audits of the financial statements of nonpublic broker-dealers must be conducted in accordance with generally accepted auditing standards.

Once a firm registers with the PCAOB, it must comply with pending rules which, if adopted, will require the registered firms to file annual and special reports. The annual report will contain basic information about the firm. The special reports relate to certain specified events. Once these rules are effective, firms will also have to pay an as-yet unannounced annual fee. The failure to comply with the reporting or fee requirements could result in disciplinary sanctions which may include the revocation of a firm’s registration.

Once a firm submits its electronic registration application, the Board has up to 45 days to approve it, disapprove it or call for a hearing. The time it will take to act on the application will vary based on the information contained in the application and the number of pending applications. If the Board requests additional information, a new 45-day period commences. If the Board determines to hold a hearing, an applicant may treat the hearing notice as a denial. If it does not do so, it will have waived the 45-day requirement for Board action.

The staff urges firms to pay close attention to the definitions of the terms used in the application such as issuer, audit, audit report and associated person. The form contains boxes that may be checked if the item is not applicable to the firm. The staff noted that audit work may include work that is used by another firm in connection with the other firm’s audit of an issuer. Applicants should carefully consider whether they played, or expect in the current calendar year to play, a substantial role in the audit of an issuer as the term is defined in the registration application.

The firm’s statement of its quality control policies should be a clear and concise summary of the firm’s policies on independence, integrity and objectivity. The summary should provide an overview of the policies with respect to engagement performance, personnel management, the acceptance and continuance of clients and engagements, and monitoring.

The staff advised that certain information may be relevant to its consideration of an application. Applicants that have certified financial statements for SEC filings by broker-dealers in the two year period preceding the submission of the application and plan to continue to do so should indicate that fact in the applicant profile section of the first page of Form 1. The firm should list all of the broker-dealers for which the firm certified financial statements in the preceding calendar year, including the address of each broker-dealer and the dates of the certifications.

The firm should also describe any disciplinary histories with respect to its proprietors, partners, principals, shareholders or officers, or any accountants employed by the firm who participated in the work relating to the certification of broker-dealer financial statements.

The registration applications are posted on the PCAOB’s Web site after they are approved or disapproved. If a firm wishes to protect information in its application, it may request confidential treatment. The firm must attach an explanation of its reason for seeking confidentiality. The firm will have to submit two versions of exhibit 99.1, one containing all of the information and the other redacting the portions of the exhibit for which the firm is seeking confidential treatment.