Broker Dealer Auditing: Understanding the New SEC and PCAOB Rules and Standards in 2015 LIVE Webcast

Speaker Firms and Organization:
Dixon Hughes Goodman LLP
Heather Cozart
Partner
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Presented By:
February 12, 2015
1
Partner Firms:
Phillips Lytle LLP
Robert V. Cornish, Jr.
Partner
PCAOB
Lisa Calandriello
Assistant Chief Auditor
PCAOB

February 12, 2015
2
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Partner Firms and Organization:
February 12, 2015
6
Phillips Lytle LLP is a premier regional law firm that is recognized nationally for
its legal excellence. With offices in New York State, Washington, DC, and
Canada, our attorneys serve a multinational client base including FORTUNE
1000 companies, global and regional financial institutions, not-for-profit
organizations, middle market companies, startups, entrepreneurs and
individuals on important matters affecting their businesses and personal
wealth. Superior client service continues to be the cornerstone of our success.
In fact, Phillips Lytle is included in the Top 100 of the BTI Client Service A-
Team 2014 for recognition by FORTUNE 1000 in-house counsel for delivering
superior client service.
PCAOB
Headquartered in Charlotte, DHG ranks among the top 20 public accounting
firms in the nation. With more than 1,800 professionals in 12 states, DHG
combines deep experience with a strong commitment to personal service.
DHG’s professionals are passionate about helping clients succeed through a
resourceful approach to solving problems, providing solutions and helping
clients achieve their goals.
DHG’s Financial Services practice focuses on publicly traded and privately-
held financial services companies across the U.S. More than 30 financial
services partners and 200+ dedicated professionals provide in-depth,
specialized industry knowledge and a wide range of accounting, tax and
advisory services to address issues facing the industry in today's challenging
environment.

Brief Speaker Bios:
Lisa Calandriello
Lisa Calandriello is an assistant chief auditor in the Office of the Chief Auditor, providing technical direction in the development of
auditing and related professional practice standards.
Prior to joining the PCAOB in 2010, Ms. Calandriello was a senior manager at Deloitte & Touche LLP, working in the securities,
depository institutions, finance company, and employee benefit plan industries.
February 12, 2015
7
Heather Cozart
Heather is a Partner in DHG's Financial Services Group with more than 16 years of experience.
She serves clients ranging from de novo community banks to large multi-billion dollar regional banks, broker-dealers and finance
companies. She is experienced in the completion of quarterly and annual SEC filings, mergers and acquisitions, stock registration
statements, Sarbanes-Oxley compliance, internal control documentation, employee benefit plans, SSAE 16 reporting, agreed-upon
procedures, internal audit engagements and other special engagements. Heather is a technical resource for the firm regarding SEC,
PCAOB, broker-dealer and other public company matters.
► For more information about the speakers, you can visit: http://theknowledgegroup.org/event_name/broker-dealer-auditing-understanding-the-new-sec-and-pcaob-rules-and-standards-in-2015-live-webcast/
Robert V. Cornish Jr. is a partner with Phillips Lytle LLP and focuses his practice on litigation, arbitration, regulatory and compliance
matters for broker/dealers, investment advisors, hedge funds, commodity firms, institutional investors and family offices in the U.S.
and abroad. He represents clients on FINRA and NFA arbitrations and court proceedings. He also represents securities and
commodities registrants in connection with enforcement and disciplinary proceedings before FINRA, NFA, CFTC, SEC and state
securities regulators. Having previously held positions of in-house counsel and Chief Legal & Compliance Officer with prominent
investment firms, Mr. Cornish provides valuable insight and counseling for investment management clients with complex business
management and marketing matters. Additionally, Mr. Cornish is a member of SIFMA Legal & Compliance Division, a certified speaker
for CFA Institute Speaker's Bureau, and an industry arbitrator for FINRA and National Futures Association. He graduated with a
political science degree from Davidson College in 1989 and received his J.D. from Samford University, Cumberland School of Law in
1993.

The Public Company Accounting Oversight Board (PCAOB) adopted a new auditing standard and amendments
requiring auditors to pay close attention to related-party transactions and significant unusual transactions, as well
as a company’s financial relationships and transactions with its executive officers when under-taking audits.
These transactions and relationships potentially create risk of misstatements of company finances.
The Knowledge Group has assembled a panel of key thought leaders to provide the audience with an in-depth
analysis and thorough discussion of the SEC and PCAOB New Standards on Broker Dealer Auditing of Related-
Party Transactions.
In a two-hour live webcast, the speakers will discuss:
• Implementation of Rule 17-a-5 and the PCAOB Audit & Attestation Standards
• New Requirements of Broker-Dealers
• New Requirements of External Auditors
• Impact on Audit Procedures
• Overview of PCAOB Auditing Standard 18
• PCAOB Interim and Permanent Inspection Program
• Compliance Issues and Regulatory Updates
February 12, 2015
8

Featured Speakers:
February 12, 2015
9
SEGMENT 1:
Lisa Calandriello
PCAOB
SEGMENT 3:
Partner
Phillips Lytle LLP
SEGMENT 2:
Heather Cozart
Partner

Introduction
Lisa Calandriello is an assistant chief auditor in the Office of the Chief Auditor, providing technical direction in the
development of auditing and related professional practice standards.
Prior to joining the PCAOB in 2010, Ms. Calandriello was a senior manager at Deloitte & Touche LLP, working in the
securities, depository institutions, finance company, and employee benefit plan industries.
Ms. Calandriello earned a B.S. in accountancy from American University. She is a certified public accountant in Virginia,
Maryland, and the District of Columbia.
February 12, 2015
10
SEGMENT 1:
Lisa Calandriello
PCAOB

Changes to Annual Reporting and Audit
Requirements for Brokers and Dealers and an
Update on the PCAOB Interim Inspection
Program related to Audits of Brokers and
Dealers
Lisa A. Calandriello, Assistant Chief
Auditor
Office of Chief Auditor
February 12, 2015

Caveat
The views expressed are my own and do not
necessarily reflect the views of the Board, its
members or staff.

Agenda
 Changes to the audit requirements resulting
from the amendments to SEC Rule 17a-5
 Recently Adopted PCAOB Standards for
Audits of Brokers and Dealers
 Update on the PCAOB Interim Inspection
Program related to Audits of Brokers and
Dealers
 Auditing Standard No. 18, Related Parties
 How to Learn More and Keep Current
13

SEC Rule 17a-5 Requirements for Annual Reports
of Brokers and Dealers* and Applicability of
PCAOB Standards**
Broker-Dealer Related Auditor Requirement
Broker Dealer
does not claim
exemption from
Rule 15c3-3
Financial Report:
• Financial statements
• Supporting Schedules
Compliance Report (new)
Audit: PCAOB STANDARDS
Audit procedures (in relation to):
AS 17
Examination (opinion): AT 1
Broker Dealer
does claim
exemption from
Rule 15c3-3
Financial Report:
• Financial statements
• Supporting Schedules
Exemption Report (new)
Audit: PCAOB STANDARDS
Audit procedures (in relation to):
AS 17
Review (moderate assurance):
AT 2
* Effective for all broker-dealers with fiscal years ending on or after June 1, 2014.
** Effective for all audits of SEC-Registered broker-dealers with fiscal years ending on or after June 1, 2014.
14

15
Recently Adopted Standards for Audits
of Brokers and Dealers
 Attestation Standard No. 1 – Examination
Engagements Regarding Compliance Reports
of Brokers and Dealers (AT 1)
 Attestation Standard No. 2 – Review
Engagements Regarding Exemption Reports of
Brokers and Dealers (AT 2)
 Auditing Standard No. 17 – Auditing
Supplemental Information Accompanying
Audited Financial Statements (AS 17)

Examinations of Compliance
Reports

Compliance Report
 Required statements as to whether:
 The broker-dealer has established and maintained
Internal Control over Compliance*
 Internal Control over Compliance was effective during
the most recent fiscal year
 Internal Control over Compliance was effective as of
the end of the most recent fiscal year
 The broker-dealer was in compliance with Rule 15c3-1
and Rule 15c3-3(e) as of its fiscal year-end
 The information used to state whether it was in
compliance was derived from the books and records of
the broker-dealer
* Not covered by the examination engagement.
17

 If applicable, a broker-dealer would be
required to include:
 A description of each material weakness in Internal
Control Over Compliance during the most recent fiscal
year
 A description of each instance of non-compliance with
Rules 15c3-1 or 15c3-3(e) as of the end of the most
recent fiscal year
Compliance Report
18

AT 1 - Examination Engagements Regarding
Compliance Reports of Brokers and Dealers
 Applies when auditor examines certain
statements in the broker’s or dealer’s compliance
report
 Covers four assertions:
 Internal control over compliance during the year
 Internal control over compliance as of year end
 Compliance with net capital rule and reserve
requirements rule (paragraph (e) of SEC Rule15c3-3)
 Whether the information for asserting compliance with
the net capital rule and reserve requirements rule was
derived from the broker’s or dealer’s books and records
19

(cont.)
 Sets forth an approach consisting of:
 General and planning procedures, including
consideration of risk
 Selecting and testing controls over compliance
 Testing compliance with the net capital rule and
reserve requirements rule, including obtaining
evidence about the existence of customer assets
 Performing procedures, in connection with
compliance tests, to determine whether the
information used to assert compliance is derived from
the books and records
20

(cont.)
 Requires coordination with the financial
statement audit and audit procedures on
supporting schedules
 Includes communication requirements to the
audit committee and/or management
 Provides requirements for the auditor’s report
which address both unqualified and adverse
opinions
21

Exemption Report
 The provisions in Rule 15c3-3(k) under which the broker-
dealer claimed an exemption from Rule 15c3-3
 Either:
 The broker-dealer met the identified exemption provisions in Rule
15c3-3(k) throughout the most recent fiscal year without exception,
or
 The broker-dealer met the identified exemption provisions except
as described in the Exemption Report
 If applicable, an identification of each exception, a
description of the nature of each exception, and the
approximate date(s) on which the exception existed
23

AT 2: Reviews of Exemption Reports
 Applies when auditors review the statements in
a broker’s or dealer’s exemption reports
 Review engagement: moderate assurance
 Focuses on conditions that might cause the
assertions not to be fairly stated, in all material
respects, e.g.:
 Incorrect exemption provision
 Incorrectly asserting that exemption provisions met
without exception
 Incorrect or incomplete list of exceptions
24

AT 2: Reviews of Exemption Reports (cont.)
 Sets forth an approach that covers:
 General and planning procedures, including
consideration of risk factors
 Review procedures to obtain moderate assurance
 Additional procedures, in certain instances
 Communication to the audit committee and/or
management
 Requires coordination with the financial
statement audit and audit procedures on the
supporting schedules
 Establishes reporting requirements
25

Auditing Supporting Schedules
under AS 17

AS 17: Auditing Supplemental
Information Accompanying Audited
Financial Statements
 Auditor of the financial statements performs audit
procedures and reports on supporting schedules
 Report issued on supplemental information,
separately or combined with the audit report on
financial statements
 “In relation to approach”
 generally use the same materiality considerations as for
the financial statement audit
 Determining the nature, timing, and extent of
planned procedures
27

AS 17: Auditing Supplemental
Information Accompanying Audited
Financial Statements (cont.)
 Procedures to be performed, among others:
 Obtaining an understanding of the methods of prepare the supplemental
information, evaluate the appropriateness of those methods, and determine
whether those methods have changed from the methods used in the prior period
and, if the methods have changed, determine that reasons for and evaluate the
appropriateness of such changes;
 Determine that the supplemental information reconciles to the underlying
accounting and other records or to the financial statements, as applicable;
 Perform procedures to test the completeness and accuracy of the information
presented in the supplemental information to the extent that was not tested as
part of the audit of financial statements
 Evaluated whether the supplemental information, include its form and content,
complies with relevant regulatory requirements or other applicable criteria, if any.
28

 Dodd-Frank Conforming Amendments
 Approved by the Board on December 4, 2013
 Among other things, tailors certain independence rules to apply
to auditors of broker-dealers
 Definition of audit committee (Rule 3501)
 Overall framework (Rules 3502 and 3520)
 Contingent fees (Rule 3521)
 Tax transactions (Rule 3522)
 Communications with audit committees concerning
independence (Rule 3526)
 Effective June 1, 2014
 Also amended certain registration forms
30
Conforming Amendments

 Dodd-Frank Conforming Amendments
(cont.)
 Did not amend certain other independence
rules to apply to auditors of broker-dealers
 Tax services for persons in a financial reporting oversight role
(Rule 3523)
 Audit Committee Pre-approval of Certain Tax Services (Rule
3524)
 Audit Committee Pre-approval of Non-audit Services Related
to Internal Control Over Financial Reporting (Rule3525)
31
Conforming Amendments

Update on
Interim Inspection Program

Interim Inspection Program – Disclaimer
33
The information presented in the following
slides is not necessarily indicative of the
population of firms or of audits of brokers and
dealers because the selection of firms and of
audits of brokers and dealers for inspection is
not necessarily representative of these
populations.
33

Interim Inspection Program – Reporting
34
 Inspections - First Progress Report
 Inspected 10 Firms and portions of 23 audits
 Inspections - Second Progress Report
 Inspected 43 Firms and portions of 60 audits
 Inspections – Third Progress Report
 Inspected 60 firms and portions of 90 audits
34

Compliance with Independence
Requirements
20 out of 60 Firms failed to satisfy independence
requirements by:
 Preparing, or assisting in the preparation of
financial statements or supporting schedules
 Preparation of journal entries or source data
underlying the financial statements
35 35

Compliance with Independence
Requirements - continued
 Auditors of brokers and dealers registered
with the SEC are subject to SEC
independence requirements in (b) and (c) of
Rule 2-01 of Regulation S-X.
 Effective for fiscal years ending on or after
June 1, 2014 certain PCAOB independence
rules apply to auditors of broker-dealers
36 36

Net Capital Requirements and Customer
Protection Rule
Deficiencies noted related to testing compliance
with net capital requirements:
 Minimum net capital requirements
 Allowable assets
 Haircuts
Deficiencies noted related to testing compliance
with the customer protection rule:
 Customer credits or debits
 Special Reserve Bank Account
 Possession or control requirements
37 37

Financial Statement Audit
Deficiencies noted related to:
 Revenue
 Fraud
 Related Parties
 Establish a Basis for Reliance
 Evaluation of Internal Control Deficiencies
 Financial Statement Disclosures
38 38

Auditing Standard No. 18,
Related Parties

Auditing Standard No. 18, Related Parties
 On June 10, 2014, the Board adopted Auditing Standard No. 18,
Related Parties, amendments regarding significant unusual
transactions, and other amendments to PCAOB auditing standards.
 The standard and amendments address:
 Evaluating a company’s identification of, accounting for, and
disclosure of, relationships and transactions between the
company and its related parties.
 Identifying and evaluating a company’s significant unusual
transactions.
 Obtaining an understanding of a company’s financial
relationships and transactions with its executive officers, as part
of the auditor’s risk assessment process.
40

 The standard and amendments are designed to improve audit quality
in areas that could pose increased risks of material misstatement,
including misstatements arising from fraud.
 The standard strengthens requirements for identifying, assessing,
and responding to the risks of material misstatement associated with
a company's relationships and transactions with related parties.
 The standard requires the auditor to:
 Perform specific procedures to obtain an understanding of the
company’s relationships and transactions with its related parties;
 Perform specific procedures for each related party transaction that is
either required to be disclosed in the financial statements or determined
to be a significant risk;
41
AS No. 18, Related Parties (cont’d)

 The standard requires the auditor to (cont’d):
 Perform specific procedures if the auditor determines that a related
party, or relationship or transaction with a related party, previously
undisclosed to the auditor exists;
 Evaluate whether the company has properly identified its related parties
or relationships or transactions with related parties; and
 Communicate to the audit committee the auditor’s evaluation of the
company’s identification of, accounting for, and disclosure of its
relationships and transactions with related parties.
42

 The amendments to AU sec. 316, Consideration of Fraud in a
Financial Statement Audit (along with other PCAOB auditing
standards) strengthen the auditor’s identification and evaluation of a
company's significant unusual transactions.
 Among other things, the amendments:
 Require the auditor to perform specific procedures to identify significant
unusual transactions;
 Require the auditor to perform specific procedures to obtain an
understanding of the business purpose (or the lack thereof) of identified
significant unusual transactions;
 Enhance the auditor’s evaluation of the business purpose (or the lack
thereof) of significant unusual transactions; and
 Require the auditor to evaluate whether significant unusual transactions
have been properly accounted for and disclosed in the financial
statements.
43

 The other amendments to PCAOB auditing standards require,
among other things, that the auditor obtain an understanding of a
company’s financial relationships and transactions with its executive
officers, as part of the auditor’s risk assessment process.
 A company's executive officers are in a unique position to
influence a company's accounting and disclosures.
 A company's financial relationships and transactions with its
executive officers can create incentives and pressures for
executive officers to meet financial targets, which can result in
risks of material misstatement to a company's financial
statements.
 The amendments do not require the auditor make an assessment
of the appropriateness or reasonableness of executive
compensation arrangements.
44

 Auditing Standard No. 18 and the amendments is effective for audits
of financial statements for fiscal years beginning on or after
December 15, 2014, including reviews of interim financial information
within those fiscal years.
45

How to Keep Current with PCAOB’s
Standard-Related Activities
 Website: http://www.pcaobus.org/Standards/Pages
/default.aspx
 PCAOB standards and related rules, including interim standards
 Standard-Setting Agenda
 PCAOB proposed standards
 Staff Guidance
 Standing Advisory Group
 Contact us at info@pcaobus.org
 Submit inquiries at:
http://pcaobus.org/About/Pages/ContactUsWebForm.aspx?Contact=Standard-related
Inquiries
 Sign up for the PCAOB Updates service to receive a notification via e-mail that briefly
describes significant new postings to our website:
http://pcaobus.org/About/Pages/RSSFeeds.aspx
46

February 12, 2015
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Introduction
Heather is a Partner in DHG's Financial Services Group with more than 16 years of experience.
She serves clients ranging from de novo community banks to large multi-billion dollar regional banks, broker-dealers and
finance companies. She is experienced in the completion of quarterly and annual SEC filings, mergers and acquisitions,
stock registration statements, Sarbanes-Oxley compliance, internal control documentation, employee benefit plans, SSAE
16 reporting, agreed-upon procedures, internal audit engagements and other special engagements. Heather is a technical
resource for the firm regarding SEC, PCAOB, broker-dealer and other public company matters.
She previously served in DHG’s Professional Standards Group. Prior to joining DHG, Heather was the Director of Technical
Accounting at a large publicly traded financial services company, and she also worked at the Securities and Exchange
Commission.
February 12, 2015
50
SEGMENT 2:
Heather Cozart
Partner

Overview of Requirements
February 12, 2015
51
SEGMENT 2:
Heather Cozart
Partner

New Requirements for External Auditors
• Administrative
– Initial Independence communications required
– Engagement Letter
– AS No.16 Communications with Audit Committees
– PCAOB management rep letter
– 5 year partner rotation N/A for non-public BDs
– EQR (concurring review partner) must follow AS 7
– AS No. 3 Audit Documentation
– Determination that BD has no past-due accounting support fees
– In addition to financial statements which has been covered, auditor
CANNOT prepare the exemption and compliance reports – must be done
by the broker-dealer
February 12, 2015
52
SEGMENT 2:
Heather Cozart
Partner

New Requirements for External Auditors
Access to Audit Documentation Amendments
Clearing broker-dealers must now allow their auditor to discuss audit findings with the SEC
and DEA (i.e. FINRA), and allow access to their workpapers.
• Result of amendment to Rule 17a-5
• BDs may have seen reworded engagement letters starting this year.
• Potential increase in cost to BD associated with workpaper review
• Access is intended to enhance the efficiency and effectiveness of examinations
February 12, 2015
53
SEGMENT 2:
Heather Cozart
Partner

Impact on Audit Procedures
Examination on Compliance Report/ Internal Control Over Compliance (ICOC)
– Expresses an opinion on assertions made within the BD’s compliance report.
– Robust audit documentation needed
– Must evaluate both the effectiveness of ICOC during and at end of the year,
as well as compliance with net capital rule and reserve requirements
– Must test both the design and operating effectiveness of controls
PCAOB Attestation Standard No. 1 establishes the requirements for the auditor with respect to the
examination of the BDs compliance report.
February 12, 2015
54
SEGMENT 2:
Heather Cozart
Partner

Examination on Compliance Report/ Internal Control Over Compliance (ICOC)
– Inventory/documentation of controls (including the inputs to the control,
activity performed, frequency, output).
– Testing which includes inquiry, observation, inspection, and re-performance.
– Typical areas or “processes” involved at the BDs include: Compliance,
Financial Reporting, Regulatory Reporting, Operations, Depository
Balancing, New Accounts/Clients, Custody Services, Treasury, Security
Pricing
– Sub-certification process?
– Entity level controls
February 12, 2015
55
SEGMENT 2:
Heather Cozart
Partner

ICOC differs from ICFR (internal control over financial
reporting), however in practice it is difficult to totally
separate…
In other words, think about the impact of inputs from financial
statements that may be inaccurate and the implication it has over
compliance…..
• Net capital calculation
• “Books and Records” (one of the required statements)
February 12, 2015
56
SEGMENT 2:
Heather Cozart
Partner

ICOC Material Weakness Definition
As defined in Appendix A to Attestation Standard No. 1, a Material Weakness is "a
deficiency, or a combination of deficiencies, in Internal Control Over Compliance
such that there is a reasonable possibility that non-compliance with 17 C.F.R.
§240.15c3-1 or 17 C.F.R. § 240.15c3-3(e) will not be prevented or detected on a
timely basis or that non-compliance to a material extent with 17 C.F.R. §240.15c3-3,
except for paragraph (e), 17 C.F.R. § 240.17a-13, or any rule of the designated
examining authority compliance with the net capital rule or the reserve requirements
rule was not derived, in all material respects, from the broker's or dealer's books and
records.
Auditor judgment – lets discuss an example as it relates to the net
capital calculation….
February 12, 2015
57
SEGMENT 2:
Heather Cozart
Partner

Review of Exemption Reports
Perform procedures to determine whether and to what extent the BD complies
with the specific exemption claimed during the audit period. Procedures include
reading the BDs exemption report to determine the exemptive provisions chosen
by the BD, performing inquiries and other review procedures, and evaluating
whether there should be modifications to their assertions.
PCAOB Attestation Standard No. 2 establishes requirements for the auditor with respect to their review of
the exemption report.
February 12, 2015
58
SEGMENT 2:
Heather Cozart
Partner

Example Procedures – Exemption Review Report
• Testing timely transmittal of customer funds.
• Ascertain that BD in fact does not have possession or control of customer
accounts such that it would be considered “carrying” customer accounts.
• Objective is to obtain moderate assurance that the BDs assertions are fairly
stated.
• Make sure appropriate exemptions are being stated in both reports.
February 12, 2015
59
SEGMENT 2:
Heather Cozart
Partner

In a review engagement, the auditor should communicate to management
and to the audit committee any exceptions to the exemption provisions
identified by the auditor and information that causes the broker's or dealer's
assertions about the exemption provisions not to be fairly stated, in all
material respects.
February 12, 2015
60
SEGMENT 2:
Heather Cozart
Partner

Internal control observations noted
• Controls surrounding the net capital calculation
• Issues have been noted both with BDs (control structure) and Audit Firms (audit procedures) of
not appropriately determining whether appropriate additions, allowable assets, haircuts and
operational charges were consistent with Rule 15c3-3.
• Continuous monitoring of compliance
• Missing or insufficient evidence of controls
• Management review controls lacking enough precision/detail
• Check signing authority
• Monitoring of third party vendors
• Spreadsheet controls (including access)
• Controls over revenue recognition
• Related party transactions
February 12, 2015
61
SEGMENT 2:
Heather Cozart
Partner

Auditing Standard No. 18 – Auditor’s View…
AS 18 will be effective for audits of financial statements for fiscal years beginning
on or after December 15, 2014, including reviews of interim financial information
within those years.
The additional requirements outlined in AS 18 are not insignificant and will
require additional preparation by companies as well as additional audit work by the
auditors.
If you haven’t already, talk to your auditors about how this new standard will
affect your next audit! Start now with familiarizing yourself with this new
requirement so you can assist your auditors with providing the necessary
information.
February 12, 2015
62
SEGMENT 2:
Heather Cozart
Partner

Additional Resources
Illustrative examples of the compliance report and exemption reports
required by Rule 17a-5 can be found at the following:
Compliance Report
http://www.aicpa.org/InterestAreas/FRC/IndustryInsights/DownloadableDocuments/BRD/SIFMA_Complian
ce_Report_Template.pdf
Exemption Report
http://www.aicpa.org/InterestAreas/FRC/IndustryInsights/DownloadableDocuments/BRD/SIFMA_Exemptio
n_Report_Template.pdf
February 12, 2015
63
SEGMENT 2:
Heather Cozart
Partner

Additional Resources
Member Alert – Issued Jointly by the Center for Audit Quality (CAQ) and
the AICPA.
http://www.aicpa.org/InterestAreas/FRC/IndustryInsights/DownloadableDocuments/BRD/caq-broker-and-
dealer-alert-2014-06.pdf
AICPA’s Audit and Accounting Guide Brokers and Dealers in
Securities
February 12, 2015
64
SEGMENT 2:
Heather Cozart
Partner

Introduction
Robert V. Cornish Jr. is a partner with Phillips Lytle LLP and focuses his practice on litigation, arbitration, regulatory and
compliance matters for broker/dealers, investment advisors, hedge funds, commodity firms, institutional investors and family
offices in the U.S. and abroad. He represents clients on FINRA and NFA arbitrations and court proceedings. He
also represents securities and commodities registrants in connection with enforcement and disciplinary proceedings before
FINRA, NFA, CFTC, SEC and state securities regulators. Having previously held positions of in-house counsel and Chief
Legal & Compliance Officer with prominent investment firms, Mr. Cornish provides valuable insight and counseling for
investment management clients with complex business management and marketing matters. Additionally, Mr. Cornish is a
member of SIFMA Legal & Compliance Division, a certified speaker for CFA Institute Speaker's Bureau, and an industry
arbitrator for FINRA and National Futures Association. He graduated with a political science degree from Davidson College
in 1989 and received his J.D. from Samford University, Cumberland School of Law in 1993.
February 12, 2015
65
SEGMENT 3:
Partner
Phillips Lytle LLP

PCAOB Audit Issues – An Attorney’s Perspective
Broker Dealer Auditing: Understanding the New SEC and PCAOB Rules and Standards in 2015
February 12, 2015
February 12, 2015
66
SEGMENT 3:
Partner
Phillips Lytle LLP

Outline of Topics
 An attorney's perspective on auditing issues of broker-dealers
 Working with your attorney on auditing issues
 Internal control "hot buttons" of interest to your auditors
– Risk of fraud – managing office inspections and other surveillance procedures
– Capital raising activities – subordinated notes/loans and stock offerings in the B/D
– Delegation of authority – third parties and part time personnel
– Account surveillance – options, margin, suspense accounts, error accounts
 What to do when things go awry
February 12, 2015
67
SEGMENT 3:
Partner
Phillips Lytle LLP

An Attorney’s Perspective on Auditing Issues
1. Take PCAOB seriously
2. What your auditor reports will be reviewed by FINRA and perhaps state securities regulators
3. Know your firm and how things work
4. Review WSPs and operations manuals in light of 1, 2 and 3
February 12, 2015
68
SEGMENT 3:
Partner
Phillips Lytle LLP

Working with Your Attorney on Auditing Issues
 Have counsel retained and involved in earnest before your audits
 Identify problem areas or “high risk” undertakings
 Use counsel to the extent practicable to preserve privileges
 Use counsel to communicate with regulators
February 12, 2015
69
SEGMENT 3:
Partner
Phillips Lytle LLP

Internal Control “Hot Buttons”
 Office inspections – OSJ’s, branches and remote offices
 Annual attestations
 Compliance testing and review by Senior Management
 Understand your surveillance apparatus (both clearing firm and your own systems)
 Logging/safekeeping of securities, checks and cash (and disposition of the same by select personnel)
 Record retention
February 12, 2015
70
SEGMENT 3:
Partner
Phillips Lytle LLP

Capital Raising Activities – Be Careful
 Capital raising by broker-dealers as enterprises on their own is governed by specific FINRA rules
 To whom is offering made; custody/haircuts; stock ledger and corporate minutes
 Credit worthiness of subordinated lenders
 Use of proper FINRA forms for subordinated loans/notes
February 12, 2015
71
SEGMENT 3:
Partner
Phillips Lytle LLP

Delegation of Authority – Not a Delegation of Responsibility
 Due diligence on service providers
 Surveillance and reviews of service providers
– Continuing education
– AML/OFAC/FCPA
– Trading systems
– E-mail retention
– Accountant/bookkeepers
 Use of third-parties or part-time personnel to inspect offices
 Use of third-parties for financial matters (FinOp)
February 12, 2015
72
SEGMENT 3:
Partner
Phillips Lytle LLP

Account Surveillance – Understand Business and Supervision of That Business
 Securities lending
 Margin and extensions of margin
 Foreign accounts
 Wash trading
 Proprietary accounts
 Suspense/error accounts
 Reviews of reports from trading systems
February 12, 2015
73
SEGMENT 3:
Partner
Phillips Lytle LLP

When Things Go Awry – What to Do
 The misstatement is always worse than the truth
 Acknowledge issues to auditors, attorney and regulators
 Figure out where things went wrong in the process
 Fix that process so it doesn’t happen again
February 12, 2015
74
SEGMENT 3:
Partner
Phillips Lytle LLP

► You may ask a question at anytime throughout the presentation today. Simply click on the question mark icon located on the floating tool bar on the bottom right side of your screen. Type
your question in the box that appears and click send.
► Questions will be answered in the order they are received.
Q&A:
February 12, 2015
75
SEGMENT 1:
Lisa Calandriello
PCAOB
SEGMENT 3:
Partner
Phillips Lytle LLP
SEGMENT 2:
Heather Cozart
Partner

February 12, 2015
76
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