The New Guide on Brokers and Dealers in Securities

By Altman, Howard; Temple, Raymond | The CPA Journal, October 1997 | Go to article overview

The New Guide on Brokers and Dealers in Securities


Altman, Howard, Temple, Raymond, The CPA Journal


To become more efficient, Wall Street has changed from a paper to an electronic marketplace. With an array of new diverse financial products, the financial services industry like so many other sectors of the economy, has become more specialized and complex. Consequently, the need for new guidance in accounting and auditing became obvious, because the last such guidance was codified in the 1985 Accounting and Auditing Guide on Brokers and Dealers in Securities.

To cope with all of the changes that have taken place in both the accounting profession and the securities industry, the Stockbrokerage and Investment Banking Committee of the AICPA (the committee) issued a new Audit and Accounting GuideBrokers and Dealers in Securities (the guide) on April 1, 1997. The guide is intended to aid accountants in the preparation of financial statements and assist independent auditors in the audit of financial statements of broker-dealers. It includes illustrations of sample financial statements and related disclosures and descriptions of the many unique industry specific procedures.

Although lengthy, the guide provides an excellent overview of the securities industry, as well as the unique accounting, auditing, and regulatory considerations in the industry.

Consisting of seven chapters, 14 appendices, and a very useful glossary, the guide is organized as shown in Exhibit 1.

Financial Reporting

The guide incorporates the requirements of newly enacted pronouncements from the FASB and the AICPA. For example, SFAS No. 125, Accounting for Certain Transfers and Servicing of Financial Assets and Extinguishments of Liabilities and FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts that have a direct impact on the financial statements of broker-dealers, are integrated into the guide. The expectation-gap auditing standards of 1988 are dealt with in the chapter on auditing considerations as well as SAS No. 82, Consideration of Fraud in a Financial Statement Audit. In addition, significant industry related changes have been incorporated, including Rule 15c61, that decreases the allowable settlement period for regular-way trades from five business days after trade date to three. The guide requires two significant changes in financial reporting: 1) it does not allow combining of subordinated liabilities (those qualifying as capital in computing net capital requirements) with stockholders' equity in the statement of financial condition and 2) it requires that delayed delivery transactions be reported in the statement of financial condition on the settlement (delivery) date instead of the trade date.

The Securities Industry

The guide provides an overview of the operations of brokers and dealers by describing the various functions they perform, and touches on the financial markets, clearing organizations, depositories and business activities.

Broker-dealers perform various functions, including acting as agents to facilitate customer security transactions, and buying and selling for their own account with customers and other dealers. Many firms operate in both capacities and their range of activities is almost endless. For example, broker-dealers can provide such financial services as

underwriting, or participating in the underwriting of, publicly offered securities;

assisting in the private placement of securities;

providing investment research and advice;

developing new financial products, including derivatives;

providing a source of market liquidity (market makers and specialists) and creating a secondary market for many products;

providing loans and financing, including equity and mortgage loans;

providing the means for companies to hedge foreign currency, interest rate, and other risks;

accommodating international investing, including U.S. investment in foreign markets and the investment activity of foreign investors in the U. …

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