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Broker-Dealers, Prepare Thyselves for More Intrusive Audits

Posted on by Caleb Newquist

SEC commissioners will vote today on proposed changes to broker-dealer auditing and reporting rules at a meeting in Washington. As with the 2009 rules, which tightened oversight of advisers’ custody of client assets after Bernard Madoff Ponzi scheme was exposed, the new changes increase oversight of the minority of about 300 broker-dealers who hold customers’ cash.

The proposals — which would be opened for a 60-day comment period — would require that a broker-dealer’s internal controls be checked by a registered public accounting firm and would let regulators examine the broker-dealer’s audits. Broker-dealers would have to file quarterly reports describing whether they have access to client money and how any access is controlled. [Bloomberg]

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Crowe Horwath Audit Partner Uses “The Tax Department Is on Another Floor” Defense

Auditors and audit firms have few options when it comes to defense strategy when they are sued for missing a fraud. If fraud occurs and an auditor partner claims to know everything that one should about his/her client, then the partner was probably in on it. That’s a little tricky.

However, if fraud occurs and the partner claims that he/she had no knowledge of any unscrupulous activity, then that means the audit sage is really just a two-bit glad-hander that couldn’t tell a debit from a credit.


And that appears to be the case of William Brizendine, a Crowe Horwath partner, who is claiming that he didn’t know about the relationship between executives of Peoples Bank of Northern Kentucky and Bill Erpenbeck who were engaged in scheme that artificially inflated the purchase price of model homes. Brizendine claims that he couldn’t possibly known that his client was involved with such a shifty character A) the bank’s execs didn’t tell him until after the shit hit the fan and B) this Erpenbeck character’s name only came up on the tax returns and why on Earth as an audit partner, would he look at those?

The bank’s lead attorney, Ron Parry, tried to establish that Brizendine was in a unique position to expose the fraud before it became large enough to take down the bank. Parry said auditors had to be aware of the business relationship because they also did the taxes of the company Finnan and Menne created with Erpenbeck.

[…]

Brizendine claimed he didn’t know of the relationship because he was just involved in the auditing of the bank and that JAMS tax returns were done by the tax department on another floor of the company’s offices.

Parry was able to show, however, that JAMS tax documents were sometimes sent directly to Brizendine. Brizendine claimed he never looked at those documents since his department didn’t prepare taxes.

Brizendine also admitted on the stand that he was the person who brought in the contract to do JAMS taxes.

Senators Grassley and Reed Would Like to Make Every Bit of PCAOB Wrist Slapping Public

For some time now, quite a few people have been asking for PCAOB disciplinary proceedings to be made public. Since your beloved Board came into existence, the process of slapping around sketchy auditors has been secret much to the chagrin of those people that would like audit firms to take just a little bit [pointer and thumb about an inch apart] of responsibility when they royally screw things up. It’s all for the investors, you see. After some rib jabbing by Board Member Dan Goelzer and Chairman Jim Doty, Chuck Grassley (R-IA) and Jack Reed (D-RI) have picked up the flag by introducing a bill that would make the proceedings public:

The bill would change a provision of the Sarbanes-Oxley Act that requires the Public Company Accounting Oversight Board to keep disciplinary proceedings against auditing firms confidential.

Undoubtedly, this will rankle auditors who would prefer that all the skeletons stay firmly stuffed in closets. Of course what many people forget is that the secretive nature of the PCAOB disciplinary proceedings are the exception rather than the rule:

[Grassley and Reed] argued that the PCAOB’s closed proceedings run counter to the public enforcement proceedings of other regulators. Not only the SEC, but also the Labor Department, the Federal Deposit Insurance Corporation, the U.S. Commodity Futures Trading Commission, and other government agencies use public proceedings, as does the self-regulating Financial Industry Regulatory Authority. Nearly all administrative proceedings brought by the SEC against public companies, brokers, dealers, investment advisers and others are open, public proceedings.

The Reed-Grassley bill would make PCAOB hearings and all related notices, orders and motions, open and available to the public unless otherwise ordered by the board. The PCAOB procedure would then be similar to SEC Rules of Practice for similar matters, where hearings and related notices, orders, and motions are open and available to the public.

This all seems like a pretty good idea. I mean, what makes auditors so special? Exactly. They’re not. They just happened to go from self-regulated to regulated in a flash and had a few K Street types twist in some features to Sarbanes-Oxley that kept things under wraps.

The problem, as a few people have pointed out, is that the Board still isn’t really that tough on auditors. Sure, a few more people might suffer some public embarrassment (which we’re happy to point out), but will investors really be better off? That remains to be seen but at least we’ll all be able to revel in the good fun of mocking the offenders.

Senate Bill Would Make PCAOB Disciplinary Hearings Public [AT]