As broker-dealers prepare for their 2024 year-end audits, they have an opportunity to enhance compliance with new regulatory requirements while addressing areas of increased focus from recent Public Company Accounting Oversight Board (PCAOB) inspection findings. The updated segment reporting standards under Accounting Standards Codification (ASC) 280 introduce more detailed disclosure obligations, enhancing transparency and helping investors better understand firm performance.

Recurring areas of focus highlighted by the PCAOB, such as IT general controls and customer protection, may require additional attention this year. By proactively addressing these areas, broker-dealers can set the stage for a smoother year-end process.

The following sections outline actionable steps broker-dealers can take to ensure they are audit-ready and positioned for a successful, disruption-free year-end.

1. Enhanced Segment Reporting (ASC 280)

The latest updates to ASC 280 bring more detailed disclosure requirements for broker-dealers, even those with a single reportable segment. This year, broker-dealers are expected to provide additional insights into their operating segments to increase transparency. Important updates include:

• Detailed Expense Reporting: Broker-dealers must now disclose significant segment expenses that impact segment profit or loss, regularly reported to the Chief Operating Decision Maker (CODM)
• Other Segment Items: Broker-dealers need to report significant gains or losses affecting segment performance
• Single Segment Disclosure: Firms with only one reportable segment must reconcile segment profit or loss to consolidated income
• CODM Identification: Disclosure of the CODM is now required
• Recasting Requirements: When segment information changes, broker-dealers must update previous reports or provide detailed disclosures if recasting is impractical

Action Steps for Broker-Dealers:

• Understand the Updated Guidance: Review the latest ASC 280 requirements
• Assess Segment Reporting Processes: Evaluate whether systems and processes are in place to accurately capture and report segment-level information
• Update Past Reports if Needed: If segment information has changed, align previous reports with new requirements or prepare comprehensive disclosures
• Document CODM Decisions: Identify the CODM clearly, ensuring decision-making processes are well-documented to meet the new standards

The amendments to ASC 280 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted.

2. Net Capital Computations & Security Counts - IT General Controls

Recent audits of broker-dealers have underscored the importance of Information Technology General Controls (ITGCS) in ensuring the accuracy of data used in net capital calculations and security counts. Addressing potential ITGC enhancements will further strengthen the audit process, helping broker-dealers avoid discrepancies and ensure compliance.  

Key Focus Areas

• Data Integrity Issues: Ensure the reliability of data used in net capital calculations.
• Inadequate Access Controls: Strengthen user access controls to safeguard data integrity and create robust access controls over systems that manage security counts and net capital calculations. Ensure there are appropriate restrictions on user access to prevent unauthorized changes to critical data, supporting the integrity of the computations.
• Insufficient Reconciliation Processes: Effective reconciliation processes are vital for verifying the accuracy of reported figures. Reconciliations should be performed regularly between security counts and accounting records, preventing the risk of errors in net capital calculations.
• Weak Documentation Practices: Improving documentation can streamline audits and support compliance. Having proper documentation related to security counts and net capital computations will support a smooth audit process and make it easier to verify compliance with regulatory standards.

By reinforcing ITGCs, broker-dealers will be better prepared for accurate financial reporting and seamless year-end audits.

3. Revenue Recognition Accuracy

Given the PCAOB’s increased focus on revenue recognition processes, broker-dealers can proactively review revenue practices to ensure compliance with Financial Accounting Standards Board (ASC 606) and minimize disruptions during the audit.

Key Focus Areas

• Commission Testing: Ensure revenues align with trade details and contract terms
• Advisory Fees: Ensure that advisory fee rates and assets under management match customer contracts
• Revenue Disaggregation: Review revenue classifications to confirm proper disaggregation and presentation

Action Steps for Broker-Dealers:

• Strengthen controls over revenue recognition, ensuring that commission and fee-based revenues adhere to contract terms
• Conduct internal reviews to confirm revenue classifications align with ASC 606
• Prepare supporting documentation and ensure that any complex revenue sources, such as investment banking fees, are clearly outlined and justified
4. Customer Protection Rule Compliance

With the Customer Protection Rule receiving increased audit focus, broker-dealers can proactively validate reserve calculations and possession or control requirements to support audit readiness.

Key Focus Areas

• Reserve Computations: Ensure that reserve calculations are accurate and compliant
• Possession or Control: Verify processes for customer securities, especially fully paid and excess margin securities

Action Steps for Broker-Dealers:

• Review customer reserve computations for reporting financial and operational data for accuracy
• Maintain clear documentation and processes for possession or control requirements, ensuring that instructions to reduce to possession or control are issued for applicable securities
• Conduct internal assessments to confirm possession or control compliance is documented and traceable
5. Related Party Transactions and Disclosures

With related party transactions receiving greater audit scrutiny, broker-dealers should confirm their data and disclosures are accurate, positioning them for a smoother audit process.  

Key Focus Areas

• Data Accuracy: Confirm that data used in related party transactions accurately allocates expenses and revenues
• Disclosure of Related Party Transactions: Ensure that all related party relationships are fully disclosed

Action Steps for Broker-Dealers

• Implement strong controls to ensure data accuracy for related party transactions
• Work with auditors to facilitate full access to relevant documentation
6. Fair Value Measurement

Enhanced scrutiny of fair value measurements, particularly for securities like municipal bonds, means broker-dealers can benefit from a proactive review of valuation practices and fair value classifications.

• Fair Value of Securities: Auditors may increase testing around the valuation of securities, particularly for those classified under FASB ASC 820
• Fair Value Hierarchy: Ensuring that securities are correctly classified within the fair value hierarchy may receive additional focus

Steps for Broker-Dealers:

• Conduct internal reviews to verify that securities are valued correctly
• Strengthen controls over fair value measurement, ensuring that the accounting team is equipped to provide accurate classifications for audit purposes
• Ensure accurate fair value classifications and documentation for audit purpose

Preparing for a Smooth Year-End Audit

By focusing on audit readiness, broker-dealers not only meet new regulatory standards but also support their long-term operational stability. Effective audit preparation benefits broker-dealers by:

• Fostering Investor Confidence: Transparent and accurate financial reporting builds trust with investors
• Strengthening Operational Integrity: Proactive audit readiness helps address potential issues early
• Ensuring Regulatory Compliance: Meeting regulatory requirements minimizes the risk of penalties and ensures adherence to industry standards

Conclusion

Taking a proactive approach to audit preparation will help broker-dealers achieve a smooth, efficient audit process in 2024. By reinforcing internal controls, maintaining thorough documentation, and aligning with the latest reporting requirements, broker-dealers position themselves for success. Consultants can further support this effort by providing expert guidance, reinforcing the firm’s commitment to transparent and accurate financial reporting, and enhancing overall audit readiness.