The Audit Firms of Broker-Dealers

In 2018, 400 audit firms competed for market share among 3,661 total broker-dealers. The Big Four audited 16.7% of this population. PwC led the way with 172 broker-dealer clients, followed by EY with 168 clients, KPMG with 145 clients, and Deloitte with 126 clients. Other leading audit firms include Ohab & Company, Alvarez & Associates, Withum, and RSM. 

Together, the leading 15 audit firms accounted for 37.3% of the broker-dealer clients.

Selecting an auditor is of particular importance for broker-dealers due to the strict rules they must abide by. Some of these rules are listed below: 

  • The Securities Exchange Act of 1934 (“Exchange Act”), Rule 15c3-1, Net Capital Requirements for Brokers or Dealers;
  • Exchange Act Rule 15c3-3, Customer Protection – Reserves and Custody of Securities;
  • Exchange Act Rule 17a-13, Quarterly Security Counts to be Made by Certain Exchange Members, Brokers and Dealers; and
  • any rule of a designated examining authority that requires the broker-dealer to send account statements to customers.

Rule 15c3-1 requires broker-dealers to adhere to financial responsibility requirements by maintaining a minimum net capital in order to remain solvent. Net capital is defined as “net worth adjusted by certain deductions for illiquid assets and reserves against possible market losses on securities position”. Net worth can be influenced by additions of certain liabilities, allowable assets, securities classified as marketable, and operational charges (including failed foreign security transactions). Larger broker-dealers tend to have a minimum net capital requirement of $250,000, or possibly higher. Many smaller broker-dealers have a minimum net capital of $5,000.

The chart below looks at audit firms for the top 10% and 20% of broker-dealers in terms of period end net capital.  Unsurprisingly, the Big Four dominate the broker-dealer audit market, especially among the larger broker-dealers.

In a subset of the top 20% of broker-dealers in terms of net capital, 54.8% are audited by the Big Four firms, collectively. Looking at an even smaller subset –  the top 10% –  72.1% are audited by the Big Four.

Due to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Public Company Accounting Oversight Board (PCAOB) oversees the audits of broker-dealers registered with the SEC, providing customers with assurance and investors with protection – within the Audit Analytics Broker-Dealer database, 99.8% are PCAOB registered. Smaller broker-dealers in good standing are now exempt from this oversight due to the recently introduced Small Business Audit Correction Act. 

In August 2019, the PCAOB released its Annual Report on the Interim Inspection Program Related to Audits of Brokers and Dealers, which summarizes the inspection results of firms during 2018. These inspections, conducted by the PCAOB, assess firms’ compliance with applicable laws, rules, and professional standards when performing audit and attestation engagement for broker-dealers.

The PCAOB observed that the percentage of deficiencies for audit and attestation engagements remained high and continued improvement is needed, stating that significant positive impact on audit quality can be achieved if:

  • Auditors focus on improving their systems of quality control;
  • Auditors advance their knowledge and understanding of PCAOB standards; and
  • Auditors focus on improving their performance in testing internal controls when employing controls-reliance audit strategies and for examination engagements.

Interestingly, the report shows that the more broker-dealer clients a firm has, the lower the percentage of audits with audit and other deficiencies. For example, 90% of audits by firms with one broker-dealer client had audit and other deficiencies compared to 55% of audits by firms with more than 100 broker-dealer clients.

The report further analyzes firms that also audit issuers versus firms that do not; those that do had significantly less deficiencies than those that do not.

Perhaps broker-dealers are more inclined to select an auditor based on these results, as familiarity with standards and rules seems to be in a firms’ favor.

Data from this analysis came from the Broker Dealer database, powered by Audit Analytics.
For more information on this database, or our other databases, please contact us.