The Broker-Dealer Industry: Regulation, the Audit Market, and Internal Control Reporting

Abstract:     
The broker-dealer (BD) industry is facing increasing scrutiny due to the recent financial crisis and well-publicized scandals. The Dodd-Frank Act recently extended the authority of the Public Company Accounting Oversight Board (PCAOB) to include oversight of BD audits. This paper describes the current regulatory environment of broker-dealers and changes proposed by the SEC and PCAOB. We examine the current BD audit market, finding that many firms are served by auditors with very little industry-specific experience, although a shift is apparent following implementation of PCAOB registration. We examine SEC filings and describe the current disclosure levels of material weaknesses in internal control, and material inadequacies in SEC practices and procedures. We investigate the relationship between the two and find relatively few instances in which a material weakness is also considered to be a material inadequacy, reinforcing the need for further guidance as sought by the auditing profession.

Keywords: Broker-dealer, Internal control, Material weakness, Material inadequacy, Audit market, PCAOB

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