Brokers Likely To Seek More Time For Implementation Of SEBI's New Audit Proposals — Exclusive

Brokers are expected to seek more time before the implementation of major technology-driven changes in the audit process, as proposed by SEBI, people with knowledge told NDTV Profit. While most of the proposals are expected to move forward as planned, brokers are likely to seek additional time to adjust to the new requirements. 

However, there has been no official correspondence between brokers and exchanges on this matter yet.

The Securities and Exchange Board of India has proposed implementing changes from the auditing period of FY25-26. A key change here is the creation of an online portal by stock exchanges to supervise audits in real time. This system will track the progress of audits, including ensuring that auditors physically visit brokers’ premises.

These changes will be implemented in a step-by-step process, according to officials from an exchange who spoke on the condition of anonymity. Post a final circular, the exchanges will start with empanelment of auditors, followed by the development of the required online infrastructure. 

The changes are expected to be phased in gradually, with stock exchanges developing the necessary online infrastructure after the empanelment of auditors. SEBI has opened a public consultation on these proposals, with comments due by Dec. 26, 2024.

Auditors will be required to log into the portal from the broker’s location using a secure One-Time Password system, with geolocation tracking to confirm their presence. The system will also facilitate the collection and submission of audit evidence, enabling exchanges to monitor the quality of audit findings throughout the process.

The proposed changes come in response to several deficiencies identified in the current system, including the lack of mandatory physical visits by auditors, inadequate sampling, reliance on insufficient evidence, and the involvement of non-qualified auditors. SEBI has also highlighted the absence of an independent mechanism to oversee audits, which it argues has contributed to shortcomings in the process.

As part of the reform, the markets regulator has proposed that only qualified auditors meeting strict criteria be allowed to conduct audits. These auditors will be empanelled by stock exchanges, based on their individual qualifications and experience, not just the credentials of the audit firm. The empanelment process will include additional criteria for auditing Qualified Stock Brokers, who manage larger client bases and more complex trading systems.

In terms of scope, the audits will cover brokers' IT infrastructure, including disaster recovery systems, capacity planning, and efforts to address past technical issues. Auditors will also review critical technology areas such as order management systems and cloud-based services, ensuring compliance with prescribed standards for software testing and system logging.

SEBI's proposals include a standardised audit report template to ensure uniformity across audits. The reports will need to include details on the systems reviewed, sample sizes used, and evidence collected. For QSBs, audit reports will require board-level approval before submission to exchanges.

To minimise conflicts of interest, the regulator has suggested limits on auditor reappointments, with a mandatory two-year cooling-off period after three consecutive audits. Additionally, surprise inspections by exchanges may be introduced to verify auditors' on-site compliance.