Broker-dealer firms are worried about increased audit costs in the wake of the Bernard Madoff scandal.
The Securities and Exchange Commission at the end of 2008 let lapse an exemption that allowed privately owned brokerage firms to use auditors not registered with the Public Company Accounting Oversight Board of Washington.
Brokerage firms of all sizes are required to submit audited annual financials to regulators. The reports are due within 60 days of the end of a firm's fiscal year.
Due to the fact that a small, unregistered accounting firm signed off on New York-based Bernard L. Madoff Investment Securities LLC's financial statements, the SEC has ended what had been a series of exemptions for privately held broker-dealers dating back to 2003, observers said.
"The PCAOB issue is huge with everybody," said Jim Williams, president of Financial Telesis Inc., a San Rafael, Calif.-based brokerage firm.
The new mandate "is not necessary for small firms, especially small [mergers and acquisitions] firms that don't have custody of customer funds," he said.
Firms are "going to pay higher audit fees," said Michael MacPhail, an attorney at Holland & Hart LLP in Denver, who defends auditors and securities industry professionals.
Brokerage firms are "already struggling," he said. "This will be another blow."
Complying with PCAOB rules and exams can be burdensome, and some smaller accounting firms don't want to subject themselves to the oversight, Mr. MacPhail added.
"The firm that audits my firm said they're done" dealing with brokerage firms, Mr. Williams said. "They're walking away; they don't want anything to do with the PCAOB."
Mr. Williams said that he and a partner consult with another 35 to 40 broker-dealers as financial-operations principals, and the auditing firm that is ducking out handles a number of those firms as well.
"I've got to scramble to find a CPA firm to do about 20 audits" for clients, he said.
The Financial Industry Regulatory Authority Inc. of New York and Washington has been calling firms, alerting them to the need to use a registered auditor, Mr. Williams said.
"You either find a solution, merge or go out of business," said Jim Biddle, founder of The Securities Center Inc., a small broker-dealer in Chula Vista, Calif.
In San Diego County, there are few accounting firms that are registered with the PCAOB, he said.
The ones that are "want big bucks," Mr. Biddle said. "One wanted a $25,000 deposit and said that first-year expenses would be $25,000 to $50,000 and probably on the high end of that."
Mr. Biddle said that he has been spending about $5,000 a year for his audits.
"They're forcing you to take [an auditing] firm that knows your broker-dealer inside out and drive them away, and get someone new who doesn't know anything," Mr. Williams said. "And you pay more for that."
The main cost for accounting firms registered with the PCAOB is the continuing compliance responsibility in tracking all its rules, Mr. MacPhail said.
What's more, industry observers said, the extra oversight by the PCAOB doesn't really exist.
In a press release last month, the PCAOB reiterated that it doesn't have the authority to inspect or take enforcement actions against auditing firms that don't have publicly traded clients.
PCAOB spokeswoman Lucy Harvey declined to comment further.
"If they don't do anything, how is that helping anyone?" Mr. Williams said. "It's a false promise ... It's not going to prevent the Madoffs of the world."
LEGISLATIVE FIX?
Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, has promised to introduce legislative fixes to ensure that the PCAOB has authority over all registered auditors.
In her confirmation hearing last month, SEC Chairman Mary Schapiro said that she would support such a legislative fix.
But Mr. MacPhail said that the PCAOB is "being overly cautious" in saying that it can't examine or discipline auditors who handle only privately owned broker-dealers.
The Sarbanes-Oxley Act, which created the PCAOB, "should not be read as depriving the PCAOB of inspection and enforcement authority over auditors of [such] broker-dealers," he said.
Some observers feel that the PCAOB is avoiding an embarrassing admission that it can't examine all the auditors under its purview.
At the end of January, the PCAOB had 1,884 registered firms, 989 of them in the United States. Of those, 520 had no publicly traded company audit clients, according to the PCAOB.
E-mail Dan Jamieson at [email protected].
