The Public Company Accounting Oversight Board (PCAOB) has censured PwC and imposed a $1m (£760,000) penalty for audit violations related to the firm’s failure to observe the customer protection rules required by the Security and Exchange Commission (SEC) in its examination and audit of the broker-dealer Merrill Lynch, Pierce, Fenner & Smith
James Doty, PCAOB chairman, said: ‘An auditor's attention to a broker's compliance with the SEC's customer protection rule provides critical assurance that the business is protecting customer securities from liens by creditors of the broker.
‘PwC failed to fulfil its obligations during a period when Merrill Lynch exposed billions of dollars of customer assets to claims of its creditors.’
The SEC's regulations require a broker-dealer to hold certain customer securities in lien-free segregated accounts to protect them from creditor claims should the broker's business fail. Merrill Lynch reported that it had complied with the rule in fiscal year 2014 and that its internal control over compliance with the rule was effective.
However, a PCAOB investigation found that, in February 2015, PwC issued audit and examination reports without obtaining sufficient evidence about Merrill's compliance assertions, as required by PCAOB auditing and attestation standards.
In June 2016, the SEC found that for several years, including fiscal year 2014, Merrill Lynch held tens of billions of dollars of its customers' fully paid and excess margin securities in accounts that were subject to liens by third parties, in violation of the customer protection rule.
Claudius Modesti, director of PCAOB enforcement and investigations, said: ‘Investors should not have to worry that their brokers' auditors are failing to perform appropriate work in examining the safeguards around their funds.’
PwC consented to the board's order without admitting or denying the findings.
In a statement, the firm said: ‘We are pleased to have resolved the matter.’
PCAOB’s settled disciplinary order for PwC is here.
