July 23, 2014
i generally support this standard.
this standard should not be limited to brokers-dealers or even
financial entities. this rule should be part of the audit standards
for all financial statements.
related transactions should be disclosed if they are significant in
relation to ownership, revenue, expenses, or any other payment.
i support the requirements to report an unresolved irregularity to the
audit committee and the SEC, and the procedures to report on the
financial statements. i am concerned that some brokers do not have to
file financial statements for public consumption because clients and
vendors may be impacted by such irregularities in any company
dissolution or disagreement.
foreign related entities should be disclosed. transactions that may
not have a business purpose should invite more scrutiny.
management representations are not sufficient to resolve irregular
if management does not disclose related entities and the auditor finds
evidence of related entities, this is a serious problem that impacts
any other representations made by management.
i agree that auditors must qualify their opinion if their inquiries
were resolved in an unsatisfactory manner.
i am concerned that brokers may have begun related entities, such as a
clearinghouse, in order to control the settlement procedures which
might negatively impact prompt settlement. or maybe brokers, by
themselves or with other brokers, have begun related enterprises such
as a custodial entity that is supposed to hold customer assets. or
maybe brokers might have sold order flow to another entity that shorts
against the customers orders and keeps the transaction unsettled in
order to benefit from a decreased price. or perhaps the broker might
allow a selling broker to keep a transaction open and not provide the
shares within market deadlines. or maybe a broker might pay foreign
ownership interests instead of paying balances owed to their clients.
or maybe brokers have failed to protect client balances owned by the
client and thus allowed a custodial entity to rent shares. or maybe a
broker has another entity that receives income from the broker so that
some officers receive more compensation than is reported by the
broker. or perhaps a selling broker can "negotiate" a contract that
allows settlement to be postponed indefinitely by payment of a fee -
other entities would not be allowed to delay a contract such as
settlement because it would violate the broker's contract with their
buying client. such a contract might violate market regulations
because of the broker's responsibility to their client.
while auditors may find these procedures difficult, it is the
financial shenanigans of such a client that requires that auditors
take these precautions. auditors provide assurances to outside
entities - the public, regulators, customers, vendors. as such, there
is a responsibility to describe the character of the company through
representations made by the auditors. the auditor represents an
informed unrelated, and hopefully neutral, party that can provide
assurances on the financial statements.
as far as effective date of audits, i would disagree. i am aware that
these changes may cause audit firms to review their procedures and
this may delay implementation. however, i would like to see all
december, 2014 audits using these standards, not just december 31,
2014 audits. some brokers have period ending dates in december that
are not december 31 and i am especially looking forward to the broker
audits. i hope that these standards will also apply to all audits, as
all companies might benefit from public confidence in the audit
the audit function is important for the public interest. without
audits, financial statements become merely management representations.
if auditors cannot show that they implemented these audit standards,
they are at risk for lawsuit or regulatory action. some auditors have
already considered the situations described in this rule and
implemented procedures. this rule merely sets a standard for the
audits. if auditors don't perform these procedures, they risk loss of
license and possible loss of their audit company. investors' attorneys
have begun to hold audit firms accountable.
it is my opinion that the company's executive officers are the right
group to examine for related party transactions because some of the
company's officers will have direct responsibility for the production
of the financial statements.
while this rule change will increase the cost of the audit, if there
are related party transactions or unrelated transactions that do not
appear to be at arms length, this is the cost imposed by the entity
that has the conflict of interest or fraud. entities that do not have
such conflicts of interest will not be significantly impacted by this