March 6, 2014
February 24, 2014
i applaud the PCAOB's attempts to address this issue. i support their rule-making in this matter.
these are all important issues.
the customer portfolios are broker's inventory and should be scrutinized during any audit. auditors should sample the dealers' stock certificates and verify with the transfer agent. i think tolerance for error should be zero in order to find that the broker had care and custody of the customers' assets. this care and custody should also include the fact that those assets should not be mortgaged to any third party, even if there is a buyback arrangement.
if any error is found in customer portfolios, it should be corrected and a wider sample should also be taken to verify that the error is not widespread because of procedural error or fraud.
if there are any outstanding positions at the time of the audit and the market deadlines for settlement has passed, then the auditor should note that the broker has taken outstanding positions but has not completed these positions in a timely manner. the valuation of shortselling should be regarded as the lower price, since the imaginary stock has already been sold and thus this inflates the # of shares outstanding for the company. buying back shares after the stock has been sold cannot be carried at the price that has been decreased because of the additional imaginary shares. shortselling creates a debt to the buyer, a debt to the market generally. since naked shortselling has been outlawed, it would be true that outstanding short positions not settled by the settlement date are naked shortselling positions. the position should be cleared as a matter of course but auditors should not presume that these positions will be cleared over time. since this might occur, brokers should expect that any shortselling position outstanding should be bought in within a day. since the broker was not concerned about the imaginary shares that were sold, then there should be little regard for the broker's short position that has been maintained in spite of settlement expectations.
while i believe that clearinghouse netting is forcing the investors to fund the short positions and forcing the clearinghouse to assume more risk, the regulators have long ago allowed this, in spite of the damage to the investors' positions.
clearinghouses should also examine outstanding positions that have not settled. this increases risk for the clearinghouse. clearinghouses should not enable brokers to carry outstanding positions longer than settlement date.
investors and customers have a right to know the true state of the broker's financial position. investors risk their entire investment but customers also risk their portfolios by placing their investments with a broker that may go bankrupt, leaving customers to receive partial repayment of their portfolios because they are considered unsecured creditors.
regulators, investors and customers should know the identity of audit firms that have contributed to the final audit. the character of additional services should be identified.
auditor conflict of interest caused by additional contracts should be curtailed. sometimes these additional contracts for services have not been disclosed and might be more lucrative than audit services.
broker margins should be calculated and confirmed. if the margin calculation is in error, the auditor should explain the procedure about how to calculate margins to the broker. auditors should not have to explain this twice to the broker.
these proposals should be confirmed in a timely fashion so that the auditors can implement these standards and brokers know what to expect. removing uncertainty is a good thing.