AICPA issues guide ED on audits of broker-dealers.

The American Institute of CPAs stockbrokerage and investment banking committee released for comment an exposure draft of a proposed audit and accounting guide, Audits of Brokers and Dealers in Securities.

"This update incorporates all the key literature for the audit and accounting of brokers and dealers," said Thomas C. Lockburner, partner in charge of the securities industry group, Deloitte & Touche, New York, and chairman of the stockbrokerage and investment banking committee.

The proposal, which was developed to help accountants and auditors prepare and audit brokerdealer financial statements, incorporates Financial Accounting Standards Board as well as AICPA accounting standards executive committee (AcSEC) and auditing standards board requirements that were issued since the last guide was published in 1985.

The proposed guide would clarify the issues CPAs face in this area and would change a number of current practices. "For example," Lockburner said, "it would prohibit the current practice of combining subordinated debt with stockholders' equity and setting forth one number as capital on the face of the financial statements. Instead, the components would be shown separately, which would give the appearance of a smaller amount of capital than that reported under current practice." However, combined presentations would continue to be acceptable for some SEC filings, according to the proposal.

On another issue, Lockburner noted that combined financial instruments, which are created from components of an arbitrage trading strategy, would be valued based on the overall components of the transactions rather than on individual valuations. In such circumstances, combined financial instruments may include contractual receivables or payables that bear a fixed or floating interest rate.

The ED proposes that, in valuing financial instruments, practitioners consider the effects of contract interest rate differences from current replacement rates and contractual cash flow versus the redemption value of the underlying security. For example, a combined financial instrument created by selling a government security short and borrowing the security under a reverse repurchase agreement with a term approaching the maturity of the underlying government security would create contractual cash flows that may measure the value of the combined financial instrument. The guide proposes that it may be more approprate to reflect the ultimate cash flow gain or loss on an amortized basis over the term of the combined financial instrument instead of valuing the government security at market and the repurchase agreement at cost.

The ED also expands the concept of mark-to-market accounting for an entity's trading and investment positions and provides guidance in this area, Lockburner said. It would permit the marking to market of financial instruments that are linked through various trading strategies.

Lockburner stressed that the committee is continuing to work with the FASB on the appropriateness of netting certain repurchase and reverse repurchase transactions. While the committee and AcSEC supported the netting of certain transactions, the FASB did not agree, he explained. "We've asked the board to reconsider and to issue an interpretation that would permit netting in certain circumstances," he said.

In addition, the ED is clearer than the 1985 guide on how to implement trade date accounting (recognition of the date on which a security transaction actually was executed as the date to be used on the financial statement) and reaffirms its use, according to Richard C. Flowers, capital markets industry director, Arthur Andersen & Co., New York. "It also gives CPAs a better understanding of the securities industry, and that is important," he added.

Comments on the guide must be received by November 16. One copy of the document (product no. 800071JA) is available without charge until that date from the AICPA Order Department, Harborside Financial Center, 201 Plaza Three, Jersey City, New Jersey 07311-3881. Send comments to Al Goll, Technical Manager, Accounting Standards Division, File 4340.SG, AICPA, 1211 Avenue of the Americas, New York, New York 10036-8775.