Surprise! Audits could cost up to $24,000 per pop

If a Securities and Exchange Commission proposal that advisers deducting fees from client accounts conduct annual surprise audits is enacted, such audits could cost as much as $24,000 apiece, some three times the $8,000 estimated by the SEC, according to the Financial Planning Association.

If a Securities and Exchange Commission proposal that advisers deducting fees from client accounts conduct annual surprise audits is enacted, such audits could cost as much as $24,000 apiece, some three times the $8,000 estimated by the SEC, according to the Financial Planning Association.

In a July 28 comment letter to the SEC regarding its controversial proposal, the Denver-based FPA said that the SEC’s cost estimate is based on an out-of-date 2002 analysis.

According to the FPA’s calculations, the average cost of the audits would range from $15,000 to $24,000.

The SEC’s rule was proposed in the wake of the $65 billion Ponzi scheme perpetrated by Bernard L. Madoff Securities LLC of New York that came to light in December.

But the proposal for advisers who deduct fees is inappropriate, the FPA said in a letter signed by Duane Thompson, managing director of its Washington office.

“Ponzi fraud requires physical custody, not fee deductions, to operate,” he wrote.

Protections are already in place for fee deduction practices, and third-party custodians used by most advisory firms offer additional protections, Mr. Thompson said.

The FPA urged the SEC to wait until its inspector general finishes its report on the Madoff case, and Congress passes reform measures, before the SEC acts on rule changes for advisers.

As an alternative to the requirement that advisers conduct surprise audits, the FPA suggested strengthening the authority of the Public Company Accounting Oversight Board to oversee audits of firms that hold physical custody of assets.

The SEC previously exempted privately held broker-dealers, such as Madoff’s firm, from undergoing audits by accounting firms fully regulated by the PCAOB of New York and Washington.

Even though the SEC has since ended the exemption, legislation needs to be enacted that will give the PCAOB enhanced authority over firms that audit broker-dealers, the FPA said.

“Registration with PCAOB does not automatically allow it to inspect all its registrants unless the firm is involved in examining public companies,” the FPA wrote.

Legislation has been introduced by House Capital Markets Subcommittee Chairman Paul Kanjorski, D-Pa., that would allow the PCAOB to regulate fully accounting firms that audited all brokers, including privately held brokers.

SEC Chairman Mary Schapiro has called for Congress to enact it.