* Problems found in all 23 audits that inspectors checked
* Regulators tighten scrutiny after Madoff
By Dena Aubin
NEW YORK, Aug 20 Nearly four years after Bernard
Madoff admitted using his firm for a massive Ponzi scheme, a
U.S. audit watchdog group says it is disturbed by problems that
persist in audits of broker-dealers, including a failure to
assess the risk of fraud.
In its first report on inspections of broker-dealer
auditors, the Public Company Accounting Oversight Board said on
Monday it found problems in all 23 audits it reviewed, including
failure to test controls over customer funds.
The problems were found during inspections of small
broker-dealer audits conducted between October 2011 and February
2012. Broker-dealers are typically people or firms that both
execute orders for others and deal in trades for their own
"Even with this small group of audits inspected thus far,
the results are disturbing," PCAOB board member Jeanette Franzel
said at a news briefing on the report.
The inspections were authorized by the 2010 Dodd-Frank
financial reform law, which expanded the PCAOB's authority over
broker-dealer auditors after loopholes helped Madoff perpetrate
his investment fraud.
The PCAOB did not name the broker-dealers or audit firms it
targeted in the first round of inspections, citing
confidentiality requirements. It said it would report any
broker-dealer violations of laws or rules to the U.S. Securities
and Exchange Commission.
BROKERAGE FRAUDS PERSIST
Madoff used an obscure auditing firm, Friehling and
Horowitz, which was not registered with the PCAOB.
In a March 2009 complaint, the SEC said Friehling did not do
meaningful audits or confirm that customer assets even existed.
Madoff admitted to operating a Ponzi scheme for decades at
his investment advisory business, paying early investors with
money from new clients. He also operated a registered
Additional scandals at brokerages MF Global Holdings Ltd
and Peregrine Financial Group have increased pressure
on regulators to better protect customer money.
INDEPENDENCE VIOLATIONS FOUND
Federal securities law requires brokers to segregate
customers' cash from the brokers' own business accounts.
Auditors are supposed to check controls for assuring that
customer assets are safe.
In 13 of the 23 audits the PCAOB checked, audit firms did
not do enough to assess and respond to risks of material
misstatements due to fraud, the board said.
In two cases, audit firms helped prepare the financial
statements that they audited, a violation of SEC independence
Franzel called on broker-dealer auditors to read the PCAOB's
report and be sure they are not making the mistakes inspectors
The PCAOB was created by the 2002 Sarbanes-Oxley Act to
police auditors after accounting scandals led to the collapse of
Enron and WorldCom. That law gave the PCAOB the authority to
inspect auditors of public companies, though the board did not
have inspection authority over nonpublic broker-dealer auditors
until the passage of Dodd-Frank.
The PCAOB said it planned to look at about 170 audits of
broker dealers by year-end 2013 under an interim inspection
program. It will then create rules for a permanent inspection