An amendment to a broad U.S. House bill aimed at financial services reform could ratchet up the audit costs for small independent broker-dealers, says the National Association of Independent Broker-Dealers (NAIBD).
The amendment proposed by Rep. Paul Kanjorski (D-Pa.) would require all accounting firms that audit broker-dealers to be regulated by the Public Company Accounting Oversight Board (PCAOB), a nonprofit corporation created by the Sabanes-Oxley Act of 2002 to oversee auditors of public companies. That includes large, publicly-traded broker-dealers.
If passed into law, this measure would also include auditors of smaller, non-public broker-dealers. The problem, says the NAIBD, is the proposal doesn't differentiate between introducing (non-custodial) B-Ds who use outside clearing firms and don't touch client money, and larger custodial firms who directly handle client money.
Auditing standards for the latter are more complex and costly, says NAIBD Chairman Steve Distante, CEO of Vanderbilt Securities in Melville, N.Y. Applying PCAOB oversight across the board "could take out a group of independent broker-dealers who can no longer afford to be in business," Distante says.
Others agree that auditing costs could rise. "Realistically, it'll at least double or triple the [auditing] fees," says Stephen Sussman, president and CEO of Regulatory Compliance, a broker-dealer compliance firm in Londonderry, N.H.
Sussman says any cost hikes would probably be more a function of supply and demand rather than complexity of services offered. "It'll cause a lot of auditors to get out of the business of auditing broker-dealers because they'll have to be reviewed by the PCAOB rather than their own peers," Sussman says. "That's a stricter degree of peer review, and a lot of small accounting firms won't want to go through that." The result: Accountants who still perform B-D audits could charge higher fees.
Kanjorski's amendment, originally introduced to amend Sarbanes-Oxley regulation, was rolled into the Investor Protection Act that was passed by the House Financial Services Committee last month and is slated for debate on the full House floor in December.
An amendment by Rep. Scott Garrett (R-N.J.) was introduced to the Investor Protection Act that would've redirected the attention of PCAOB auditors to the custodial B-Ds. That amendment was defeated.