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PCAOB Exemption Bills - Education Piece for Legislators + Legislative Staff


Small businesses in the investment and accounting industries are asking for your support in passing the Small Business Audit Correction Act of 2018. This Act would exempt privately-held, small non-custodial brokers and dealers in good standing from the requirement to hire a Public Company Accounting Oversight Board (PCAOB)-registered audit firm to meet their annual SEA Rule 17a-5 reporting obligation and would instead reinstate the prior regulatory audit requirements.

Small Broker/Dealers are the gateway to the markets for the everyday-man and -woman; we connect buyers and sellers of every size and level of sophistication and keep markets open and active, all while creating local jobs and contributing to our communities. Our businesses are found on Main Street, not Wall Street, and we never lose sight of who we are serving, whose life savings we are responsible for, and who keeps us in business. Our customers are our friends and neighbors, members of our faith communities and people we see at our local grocery store. 

Please help us as we fight against the unfair burden on small businesses of legislation intended for public companies and larger Wall Street Brokers and Dealers that take custody of customer funds and securities (which we do not do). We need your help in passing this Act so small businesses across the country can, quite literally, stay in business.

Investment industry Brokers and Dealers are required by law and regulation to have an annual audit that produces audited financial statements. Around the turn of the century there were a slew of corporate scandals that resulted in Congress passing the Sarbanes-Oxley Act of 2002 with the intent to protect shareholders and investors from fraudulent corporate accounting and audit practices. Fast forward to the devastation of Madoff and the 2007-08 financial crisis and we saw Congress enact the Dodd-Frank Act in an effort to protect the investing public from, in part, corporate malfeasance. Included in both Acts is legislative language that changed the rules for Broker/Dealer annual audits, no matter what size firm. 

Prior to Sarbanes-Oxley, as amended by Dodd-Frank, Brokers and Dealers were required to hire a certified public accounting firm which followed Generally Accepted Auditing Standards (GAAS) when conducting Broker/Dealer annual audits. Following the enactment of the Acts, Broker/Dealers, irrespective of size, were required to hire a PCAOB-registered auditor who followed the PCAOB-defined set of audit standards, which are markedly different and significantly more complex than GAAS. The reason they are more complex is because they were designed and intended for use in the performance of financial audits of public companies with public shareholders, not privately-owned small businesses like ours. 

The PCAOB audit requirement is appropriate and the right fit for public companies and Broker/Dealers which carry customer funds or securities, like JP Morgan or Morgan Stanley, because the investing public and markets are potentially at much greater risk from these companies. 

Conversely, the PCAOB audit requirement does not make sense and is the wrong fit for privately-held, non-custodial, small Broker/Dealers. Our companies are not publicly traded companies and therefore do not have any public shareholders and we do not hold or carry customer funds or securities in our own accounts, choosing instead to hand those risks off to a clearing firm. As risk profiles go, ours is quite low.

In 2012, there were 783 PCAOB-registered audit firms. By 2016, there were only 478 PCAOB-registered audit firms. That is nearly a 40% reduction in the number of audit firms eligible to audit all public companies as well as the approximately 3700 Broker/Dealers around the country. The scarcity of supply, combined with public companies and the investment industry’s demand, has resulted in unsustainable cost increases for small businesses. The indisputable fact is the PCAOB Interim Program has inflicted harm on the small investment and accounting business communities, with empirical evidence relating to customer protection sorely lacking. 

The one-size-fits-all PCAOB audit requirement has inflicted substantial harm to small broker dealer businesses with limited human and financial resources. These PCAOB audits cost multiples of what our prior audits cost and take 3-5x the number of man-hours to complete, and we simply cannot continue to sustain these burdens; these complex and expensive audits are contributing meaningfully to the current trend of small firm demise. If we can correct this issue through legislation we will change the course for many of these small firms, their employees, and their customers.

In closing, there has been a dangerous contraction in the number of small business Broker/Dealers in the investment industry over the past decade. Fewer small firms translates to fewer firm choices for our retail customers, which then reduces their access to locally-sourced sound investment advice and potentially the markets in general. 

The small firm Broker/Dealer community represents over 90% of the firms in the brokerage industry and almost three-quarters of our companies employ 20 or fewer people. The one-size-fits-all regulation and oversight approach that holds a 3-person brokerage firm to the same standards as Merrill Lynch is unreasonable, unfair, and not working. 

Audit expenses are up sharply for small firms in all revenue classes since the 2014 implementation of the Dodd-Frank requirement that all firms must hire a PCAOB-registered audit firm and adhere to public company audit standards. Additionally, and just as importantly, time spent on audits by Broker/Dealer staff has more than tripled with the full implementation of the PCAOB audit requirements. Small businesses have limited resources, both human and financial, and the audit pricing and workload associated with the PCAOB requirement are quite literally crushing small Broker/Dealers and driving us out of business at an alarming rate. 

We are your small business owner and operator constituents and we are asking for your help with this bipartisan issue of helping small businesses. Please help our community of small businesses in your state by supporting our efforts to get the Small Business Audit Correction Act of 2018 sponsored/co-sponsored, brought to the floor of the House and Senate, and passed. Passing this Act will provide significant and much needed relief for small businesses and their retail customers in your home state and around the country. Thank you.


Paige Pierce