(Bloomberg News) U.S. accounting watchdogs said a review of 10 brokerage auditors found they all performed deficient work, and some failed to take required steps to help ensure investors' funds are safeguarded.

Reviews of 23 broker audits conducted by the firms found most financial statements weren't reviewed well enough to justify signing off on them, the Public Company Accounting Oversight Board's said yesterday in a report on its interim inspection program. The PCAOB didn't name the auditors and brokerages in the report and said they were all smaller firms.

"While the results of these initial inspections cannot be generalized to all securities broker and dealer audits and represent only a small portion of the inspections planned for the interim program, the nature and extent of the findings are of concern to the board," James R. Doty, chairman of the Washington-based industry-funded nonprofit, said in a statement.

The report came a week after New York-based WJB Capital Group Inc. was expelled from the brokerage industry for misstating financial records and nine months after the collapse of MF Global Holdings Ltd., which left customer funds unaccounted for when it filed for bankruptcy.

The PCAOB, which is supervised by the Securities and Exchange Commission, has followed Dodd-Frank Act mandates to expand brokerage oversight after Bernard Madoff was found to have used a tiny, storefront audit firm while running his multibillion-dollar Ponzi scheme.

Initial Picture

Last year, the audit watchdog established an interim inspection program to provide an initial picture of auditing among the 4,400 registered broker-dealers. The first public report from the program revealed a host of violations.

In seven audits, inspectors found failures to test net- capital standards prescribed to ensure brokers have sufficient liquidity. In two instances, auditors didn't verify that "special reserve bank accounts" were properly designated to ensure customer funds were separate from the brokerage's. In two cases, firms "failed to maintain independence" by auditing statements they helped prepare.

"The failure rates here are mind-boggling," said Lynn Turner, former SEC chief accountant, who said the errors could warrant enforcement actions. "This level of failure rate can only lead market participants to conclude that you cannot rely upon these audits. How after everything blows up on Madoff could you have still screwed up so bad?"

Biggest Firms

Wall Street's biggest firms, including Goldman Sachs Group Inc. and Jefferies Group Inc., are well above the range of smaller brokerages examined in the first round of inspections. Thirty firms with net capital above $1 billion hold almost 80 percent of the industry's capital, said PCAOB member Jay Hanson.