Ten years into its oversight of broker-dealer audits, the US Public Company Accounting Oversight Board (PCAOB) has released its 2025 Annual Report on the Interim Inspection Program. The findings, based on 2024 inspections, present a sobering view: high deficiency rates persist in audit and attestation engagements of broker-dealers. But beyond red flags, the report also provides a forward-looking framework, highlighting newly practical standards and systemic issues that must be addressed by firms, regulators, and broker-dealer stakeholders alike.

Persistent Deficiencies Across Engagement Types

In 2024, the PCAOB inspected 60 firms and reviewed 102 broker-dealer audit engagements. The results reveal consistent and, in some areas, worsening performance issues:

• Audit engagements: 66% had deficiencies related to insufficient or inappropriate audit evidence.
• Examination engagements (compliance reports): 59% had at least one deficiency, down slightly from 66% in 2023.
• Review engagements (exemption reports): 42% showed deficiencies, the same number as the prior year (27), although the percentage increased slightly from 40% in 2023, due to fewer engagements being reviewed.

Smaller firms—those auditing fewer than 100 issuers or broker-dealers—tended to perform worse across all engagement types, with audit deficiencies reaching 77%.

Recurring Problem Areas in Audit Quality

The PCAOB’s inspections identified multiple themes behind these deficiencies:

• Revenue recognition: Auditors failed to test whether revenues were accurately reported or properly classified, particularly under ASC 606.
• Journal entries: Weak fraud risk assessments and sampling methods undermined audit credibility.
• Compliance controls: In examination engagements, firms struggled to test the design and effectiveness of internal controls over compliance (ICOC).
• Audit documentation: Many firms failed to complete their audit archives within the required 45-day window.

Additionally, issues persisted in evaluating related-party transactions, utilizing information from service providers, and testing reserve computations under the Customer Protection Rule.

Quality Control Systems Under Scrutiny

Among the 60 firms inspected, 58% had QC deficiencies related to engagement performance. Failures included:

• Inadequate supervision by engagement partners,
• Poor quality reviews,
• Inconsistencies in independence confirmations,
• Gaps in monitoring procedures.

These systemic weaknesses point to cultural and process-level challenges within firms, particularly those with limited issuer audit experience.

The Way Forward: New Standards to Elevate Audit Quality

The PCAOB isn’t only diagnosing; it’s prescribing. Several new and updated standards, now practical or soon to be, are poised to reshape how broker-dealer audits are performed:

• AS 2105: Materiality in Audit Planning Auditors are now expected to weigh both quantitative and qualitative factors, including a broker-dealer’s regulatory context and business model, when determining materiality thresholds.
• AS 2310: Auditor’s Use of Confirmation. This updated standard, effective June 15, 2025, brings confirmation procedures into the digital age and applies uniformly across electronic and manual communications.
• AS 1000: General Auditor Responsibilities. Replacing legacy guidance, AS 1000 codifies the foundational principles of due professional care, independence, and skepticism. It takes effect for audits of fiscal years beginning on or after December 15, 2024.
• QC 1000: Firm-Level Quality Control Systems. Effective December 15, 2025, this risk-based standard requires firms to identify and mitigate specific audit quality risks across governance, resource deployment, and engagement performance.

KNAV Comments

The 2025 Annual Report offers more than a compliance checklist. It delivers a clear message: the broker-dealer audit ecosystem is still evolving, and firms must take proactive steps to ensure compliance. This includes recalibrating risk assessments, enhancing audit documentation, prioritizing investor protection, and embedding quality throughout the engagement lifecycle.

As firms prepare to adopt new standards, now is the time for leadership—at the partner, firm, and regulatory levels—to translate these insights into action. Because ten years in, audit quality for broker-dealers is not just a compliance obligation, it’s a public trust imperative.

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