Broker-Dealer Annual Audits Under Rule 17a-5: Reports, Deadlines and Engagement Terms

Every SEC-registered broker-dealer files annual reports covered by an independent public accountant's report. The work is performed under PCAOB standards, the filing deadline is short, and the engagement carries representations the client must give the SEC. A CPA firm that takes on a broker-dealer must plan for these terms at acceptance. This guide follows Rule 17a-5, 17 CFR 240.17a-5, paragraphs (d), (f) and (g).

What the broker-dealer files

Under Rule 17a-5(d)(1)(i), every registered broker-dealer must file annually:

• A financial report described in paragraph (d)(2).
• A compliance report or an exemption report. A broker-dealer that did not claim an exemption from Rule 15c3-3 throughout the most recent fiscal year, or that is subject to Rule 15c3-3(p), files a compliance report. A broker-dealer that claimed the exemption throughout the fiscal year files an exemption report. Both are executed by the person who makes the oath or affirmation.
• A report of the independent public accountant covering each of those reports.

All reports are as of the same fiscal year end each year unless the designated examining authority approves a change in writing.

What is in the financial report

Paragraph (d)(2) requires a statement of financial condition, a statement of income, a statement of cash flows, a statement of changes in stockholders', partners' or sole proprietor's equity, and a statement of changes in liabilities subordinated to claims of general creditors, all in accordance with U.S. GAAP and in a format consistent with Part II or Part IIA of Form X-17A-5. Supporting schedules include the computation of net capital under Rule 15c3-1 and, as applicable, the customer reserve computation under Rule 15c3-3. If a computation is materially different from the one in the most recent Form X-17A-5 Part II or IIA, the report must include a reconciliation with explanations; if no material differences exist, it must say so.

What the compliance report says

The compliance report states whether the broker-dealer established and maintained internal control over compliance, whether it was effective during the year and as of year end, whether the firm complied with Rules 15c3-1 and 15c3-3(e) (and 15c3-3(p)(3) if applicable) at year end, and whether the information used for those statements came from the firm's books and records. It must describe each material weakness and each instance of non-compliance. A firm with a material weakness cannot conclude that its controls were effective.

The accountant's work

Under Rule 17a-5(g), the accountant must:

1. Prepare a report based on an examination of the financial report in accordance with PCAOB standards.
2. For a compliance report, prepare a report based on an examination of the statements in the compliance report, again under PCAOB standards.
3. For an exemption report, prepare a report based on a review of the statements in the exemption report.

So a broker-dealer that claimed no exemption receives an examination of its financial report, under PCAOB standards, plus an examination of its compliance report. A broker-dealer claiming the exemption receives a review of its exemption assertions, which is a lower level of assurance.

Deadlines and statements

• Annual reports. Filed not more than 60 calendar days after the end of the fiscal year, electronically on EDGAR, as an Interactive Data File.
• Statement regarding independent public accountant. Under paragraph (f)(2), every broker-dealer required to file annual reports must file by December 10 each year (or 30 calendar days after registration, if earlier) a statement about the accountant, dated no later than December 1, with the SEC and the designated examining authority. If the engagement is of a continuing nature, providing for successive engagements, no further filing is required. A single-year engagement, or one that has been terminated or amended, needs a new statement by the required date.
• Representations in the engagement. The statement must include representations that the broker-dealer agrees to allow SEC or examining authority staff to review the audit documentation, and to allow the accountant to discuss findings with them, on written request. A broker-dealer that neither clears transactions nor carries customer accounts is not required to include some of these representations.

The consequence for the firm is that audit documentation is subject to regulator review, so the file must meet PCAOB audit documentation standards. See AS 1215 audit documentation.

Worked example of the timetable

A broker-dealer has a December 31 fiscal year end.

• Annual reports due: 60 calendar days after December 31. January has 31 days, so day 31 is January 31. February has 28 days in a non-leap year, so day 59 is February 28 and day 60 is March 1.
• In a leap year, day 60 is February 29.
• A new accountant statement, if one is needed, is due by December 10, dated no later than December 1.

Because the fieldwork is compressed into 60 days, a firm should do interim work on net capital computations, segregation calculations and the exemption or compliance assertion testing in the fall.

Second example: which report applies

• Firm A carried customer accounts and never claimed an exemption from Rule 15c3-3 during the year. It files a compliance report, and the accountant examines the financial report and the compliance report statements under PCAOB standards.
• Firm B claimed an exemption under Rule 15c3-3(k) throughout the year and is not subject to Rule 15c3-3(p). It files an exemption report identifying the provisions of paragraph (k) relied on, stating that it met them throughout the year without exception or describing each exception and its approximate dates. The accountant reviews those statements.
• Firm C claimed the exemption for only part of the year. Because it did not claim the exemption throughout the most recent fiscal year, it files a compliance report.

Other duties in the rule

• Oath or affirmation. The financial report carries an oath or affirmation that it is true and correct and that no partner, officer or director has a proprietary interest in an account classified solely as a customer account. The original is kept at least six years, the first two in an easily accessible place.
• Notification. If the accountant finds non-compliance with Rule 15c3-1, 15c3-3 or 17a-13, or a material weakness, the accountant must immediately notify the broker-dealer's chief financial officer, and the broker-dealer must make any required notification and give the accountant a copy.
• Change of accountant. A notice goes to the SEC and the designated examining authority within 15 business days after a termination, a resignation or the engagement of a new accountant without notice of termination. It covers issues in the prior 24 months and whether any report in the past two years was adverse, disclaimed or qualified.

Common errors

• Filing the statement regarding independent public accountant after December 10, or dating it after December 1.
• Filing a new statement every year for a continuing engagement, or failing to file one for a single-year or amended engagement.
• Choosing an exemption report without confirming the exemption held for the entire fiscal year.
• Omitting the reconciliation when the net capital or reserve computation differs materially from the last Form X-17A-5 filing.
• Leaving out the audit documentation and discussion representations when the firm clears transactions or carries customer accounts.

Engagement checklist

• Qualification and independence under Regulation S-X Rule 2-01, and PCAOB registration where the Sarbanes-Oxley Act requires it, as Rule 17a-5(f)(1) provides.
• Written confirmation of whether the client claims an exemption throughout the year, which determines the compliance versus exemption path.
• Net capital and reserve formula computations, tied to the general ledger.
• Related-party and clearing-agreement testing.
• Draft of the Rule 17a-5(f)(2) statement and the audit documentation representation.
• A deadline calendar with the EDGAR filing steps.

For related SEC audit topics, see PCAOB engagement quality review.

Sources

• Legal Information Institute, 17 CFR 240.17a-5, Reports to be made by certain brokers and dealers: https://www.law.cornell.edu/cfr/text/17/240.17a-5
• Electronic Code of Federal Regulations, 17 CFR 240.17a-5 (current text of the rule): https://www.ecfr.gov/current/title-17/section-240.17a-5

CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error