MHM
November 2011
The Dodd Frank Wall Street Reform and Consumer
Protection Act (Dodd Frank Act) amended the
Sarbanes-Oxley Act of 2002 (Sarbanes Oxley) to allow the Public Company Accounting Oversight
Board (PCAOB) the authority to establish audit and attestation, ethics, quality control, and independence standards for registered broker dealers. Prior to the amendments included in the Dodd Frank Act, all firms conducting audits of registered broker dealers were required to be registered with the PCOAB; however, the PCAOB did not carry out inspections or standard setting responsibilities. As a result, the PCAOB has been working on a transitional plan to put programs and procedures in place to carry out these new responsibilities.
tentative net capital as defined in Rule 15c3-1(c)(15) is greater than $5,000,000. The fees are assessed annually with the initial invoicing by the PCAOB expected to occur in the fall of 2011. The adopted amendments were approved by the Securities and
Exchange Commission (SEC) on August 18, 2011.
Statistics cited in the PCAOB Release 2011-02 conclude that approximately 86.3% of the registered broker dealers will not be subject to the fee as the average quarterly tentative net capital as defined in
Rule 15c3-1(c)(15) is less than $5,000,000 and this group of broker dealers account for only 1.1% of the total average, quarterly tentative net capital for all broker dealers.
A summary of the decisions made to date as well as the status of the PCAOB programs follows:
The Sarbanes-Oxley Act provided for a funding mechanism to establish the PCAOB through registration and annual fees levied on issuers and registered public accounting firms. In response to the amendments included in the Dodd Frank Act,
Section 109, the PCAOB adopted a proposed change
(PCAOB 2011-02) to its funding rules in June 2011 in which accounting support fees will be assessed on all registered broker dealers whose average quarterly
Additionally, prior to providing their opinion on the financial statements, auditors of registered broker dealers will be required to verify that the required support fee has been paid by obtaining a representation from the broker dealer management or a confirmation from the PCAOB.
A temporary rule adopted by the PCAOB in June 2011
(PCAOB 2011-01), provides for the establishment of an interim inspection program of auditors of registered broker dealers. The proposed rule was approved by the SEC on August 18, 2011. The PCAOB will perform the temporary inspection program, which will include all auditors of registered broker dealers, with a
® our
run deep
TM
© 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.
(Continued on page 2)

MHM Messenger
(Continued from Page 1) focus on identifying significant issues in those audits.
Results from the interim inspection program will be used to consider the scope and other elements of a permanent inspection program, which is not expected to be in place prior to 2013.
The PCAOB will use information and insights gained through the interim program to determine the scope and elements of a permanent program. Public reports on the progress of the interim inspection program will be made available at least every 12 months, however, firm-specific inspection reports are not expected during the interim inspection program except under unusual circumstances. Inspections may begin immediately; however, it is unclear if the PCAOB will incorporate the inspections of registered broker dealers into currently scheduled examinations of issuers, or whether the
PCAOB will conduct specific targeted reviews of registered broker dealers that are not issuers.
Audits of registered broker dealers that are not also issuers have historically been performed in accordance with generally accepted auditing standards (GAAS) issued by the American Institute of
Certified Public Accountants (AICPA). The SEC issued an interpretive release in October 2010 which clarified that such audits, although required to be performed by a firm registered with the PCAOB, be performed in accordance with GAAS as opposed to the standards of the PCAOB. However, as a result of the delegation of inspection and standard setting authority to the
PCAOB as a result of the Dodd Frank Act, the PCAOB and SEC have proposed certain changes, including the requirement that such audits be conducted in accordance with auditing standards established by the
PCAOB.
In June 2011, the SEC proposed an amendment to
Exchange Act Rule 17a-5 (17 CFR 240.17a-5) which will require, among other things, a broker dealer’s annual report to include a full set of financial statements and either (1) a compliance report examined by an auditor or (2) an exemption report reviewed by an auditor. These proposed amendments also require the financial statement audit, as well as the auditor’s examination or review of the compliance report and exemption report, be conducted in accordance with
PCAOB auditing standards.
Current SEC requirements provide for the auditor to issue a report regarding the existence of any material inadequacies discovered by the auditor in performing the audit of the financial statements. Under the proposed changes, this report would be replaced by a compliance attestation report or exemption report, as applicable. The compliance report is required to be filed by a broker dealer that maintains custody of customer funds or securities (i.e. carrying or clearing broker dealers) and would include assertions that address:
• Whether the broker dealer was in compliance in all material respects with the specified rules related to net capital requirements and other items
• Whether the information used to assert compliance was derived from the books and records of the broker dealer
• Whether internal control over compliance was effective during the most recent fiscal year
(Continued on page 3)
© 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.

MHM Messenger
(Continued from Page 2)
The exemption report is required of any broker-dealer that claims exemption from the requirements of the
SEC rule related to the safeguarding of customer assets and would include the specific conditions that form the basis for the exemption (i.e. introducing broker dealer). The auditor is required to issue a review report regarding management’s assertions associated with qualifying for the exemption.
As a result of the changes proposed by the SEC related to the financial reporting for broker dealers, the
PCAOB proposed two attestation standards related to the auditor’s examination of compliance reports and review of exemption reports of broker-dealers
(PCAOB Release No. 2011-004). Additionally, the
PCAOB proposed a new auditing standard regarding supplemental information accompanying audited financial statements that broker dealers and issuers file with the SEC, such as supporting schedules
(PCAOB Release No. 2011-005). Although the proposed auditing standard was designed to address the supplemental information required to be submitted by broker dealers, the standard will apply to all audited supplemental information contained in SEC filings.
of the proposed standards, the PCAOB has not established any attestation standards other than to adopt those issued by the AICPA.
The compliance report would include management assertions regarding (1) the broker dealers’ compliance with the Financial Responsibility Rules as of the reporting date, (2) affirmation that the financial information used to determine compliance was derived from the books and records of the broker-dealer, and
(3) internal control over compliance was effective during the year then ended (including affirmation there were no instances of material weaknesses). The attestation standard includes the required steps to be taken by the auditor to obtain sufficient appropriate evidence to opine on management’s assertions. These requirements would replace the existing requirements for compliance examinations of AT 601.
If a broker dealer is not subject to the custody rules, management is required to include an assertion regarding the basis for that conclusion. The auditor is then required to make inquiries and perform other procedures designed to obtain moderate assurance that the broker dealer does in fact meet the conditions for an exemption from Rule 15c3-3.
Attestation Standards Audit Standard
As noted above, the PCAOB has proposed two new standards related to the changes to Rule 17a-
5. The proposed attestation standard, Examination
Engagements Regarding Compliance Reports of
Brokers and Dealers applies to compliance reports of broker dealers. The proposed review standard,
Review Engagements Regarding Exemption Reports of Brokers and Dealers, establishes the requirements regarding expectations of procedures to be performed by the independent registered public accountant in performing the exemption review. With the exception
The proposed audit standard Auditing Supplemental
Information Accompanying Audited Financial
Statements, is intended to provide guidance in the form of audit requirements when an auditor is engaged to audit and report on supplemental information that accompanies the audited financial statements. This would include the computation of net capital and the computation for determination of reserve requirements as required by SEC Rule 17a-5. The PCAOB has proposed the standard to more clearly describe
(Continued on page 4)
© 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.

MHM Messenger
(Continued from Page 3) the procedural and reporting responsibilities of the auditor when testing the supplemental information.
Specifically, the standard: auditors of non-public brokers and dealers will not be subject to the specific provisions of PCAOB Rules
3521 through 3526.
Requires the auditor to perform certain audit procedures to test and evaluate the supplemental information, and
Establishes requirements that promote enhanced coordination between the work performed on the supplemental information with work performed on the financial statement audit and other engagements, such as a compliance attestation engagement for brokers and dealers.
The SEC’s revised Rule 17a-5 is proposed to be effective for fiscal years ending on or after December
15, 2011. The proposed effective date for the PCAOB’s attestation standards is for fiscal years ending on or after September 30, 2012. In a speech delivered at an AICPA conference on October 27, 2011, PCAOB
Chairman James Doty acknowledged the PCAOB is aware of the inconsistent effective dates and the potential issues that may arise, and are working with the SEC to address the issue. A full copy of the text from the speech is available at http://pcaobus.org/
News/Speech/Pages/10272011_DotyKeynote.aspx.
The PCAOB has established auditor independence requirements in PCAOB Rules 3520 through 3526 that supplement the SEC’s independence rules.
PCAOB Rules 3521 through 3526 contain auditor independence requirements that specifically pertain to issuers. These requirements generally relate to the provision of tax services for audit clients, auditor communications with audit committees, and audit committee preapproval of services provided by the auditor. Until the Board completes a separate rulemaking process and appropriate amendments to those rules, if any, are adopted by the PCAOB,
The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM service provider to further discuss the impact on your financial statements.
© 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.