Broker dealers registered with the Financial Industry Regulatory Authority and the Securities and Exchange Commission (SEC) are required to have an annual financial statement audit. Broker dealers with this requirement must use an accounting firm registered with the Public Company Accounting Oversight Board (PCAOB) and have an audit under the standards set by the PCAOB.
Below are some valuable tips to help you have positive broker dealer audit experience.
Your Internal Team Should be Trained
You need to ensure that your financial reporting, internal accounting, and compliance team are up-to-date on industry rules, regulations and generally accepted accounting principles (GAAP). You also need to have proper internal knowledge because auditor independence rules bar reliance on auditors for making management decisions; as well as, acting within the broker-dealer’s internal control system. This includes assisting with financial statement and footnote preparation.
Monitor Your Company’s Internal Control Systems
Make sure you have the proper controls over your systems and accounting processes and document them. Notify your auditor of any changes in internal controls, in addition to providing updates to written documents as they occur.
It is important to communicate with your auditor throughout the year to make them aware of any changes in your systems and operations. You and your auditor will benefit from continuous communication to prepare and plan for a seamless audit.
Supporting Documents
Revenue is the most important and heavily tested audit area. To ensure you are prepared for the audit you need to keep support related to the revenue recognition standard criteria below (ASC 606):
- Identify the contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price amongst performance obligations
- Determine appropriate time to recognize revenue (over time or at a point in time)
It is important to keep contractual revenue agreements, fee and commission schedules, as well as reconciliations. Prepare documentation supporting any decisions and estimates affecting revenue recognition.
In addition, make your auditor aware of new revenue streams, new transactions, and new contractual agreements.
Notify your auditor of business changes and provide them with an updated organization chart, list of related parties, list of key management, board members, and audit committee members.
Related-Party Transactions Should Be Readily Identifiable
Set up control systems specific to the approval, recording, and reporting of related-party dealings. Ensure up-to-date expense sharing and record these related expenses on time.
Update Fair Value Estimates
Reassess the valuation approaches and assumptions used for both marketable and non-marketable securities. Provide your broker-dealer auditor with the valuation calculations and supporting documentation for the key inputs and assumptions used. The Broker Dealer Checklist can also help firms organize important documentation in preparation for the audit.
Ensure Financial Statement Presentation and Disclosure is Up-to-Date
Assess the necessity of additional disclosures occasioned by operational changes or changes in GAAP requirements, which relate to your broker dealer business. You can look at example financial statements of other broker dealers online on the SEC filing system, Edgar.
Maintain a Log of All Your Correspondence with Industry Regulators and Monitor Compliance
Supply your broker dealer auditor with correspondence related to your consultations and communications with compliance consultants and regulators. Make sure you are compliant with exemption provisions and net capital requirements throughout the entire fiscal year.
Always be Prepared Before an Audit
Here’s what to keep in mind during a positive broker dealer audit experience:
- Ensure everything needed for the audit is ready ahead of time and do not provide auditors piecemeal information.
- Make it easy for your auditors to find what they are looking for.
- Predict the auditor’s questions and have relevant explanations ready.
A Positive Broker Dealer Audit Experience
Ensuring maximum teamwork and collaboration with your auditor in a bid to execute an efficient audit will not undermine independence. Talk to your auditor with regard to the implementation of these tips. They will work to minimize the chances of your business being disrupted during the audit process.
Understanding the Broker-Dealer Audit Process
Working with an accounting firm that is experienced with the intricacies of the audit process and understands the impact of the expanded regulations is essential for broker-dealers. Contact Ernst Wintter & Associates LLP or call us at (925) 933-2626.
