The Securities and Exchange Board of India (Sebi) has proposed a new online system to improve monitoring and supervision of system audits of stock brokers. Aimed at improving audit quality and accountability, this proposal will create a web-based platform for exchanges to monitor the system audit process for brokers in real time. It comes as part of Sebi’s ongoing efforts to strengthen technology management in Indian capital markets.
The proposed online mechanism aims to address several risks identified in the current audit process, which has been in place since November 6, 2013. These risks include audits conducted without physical visits to stockbroker premises, poor audit quality due to insufficient sample size and insufficient evidence. and audits conducted by unqualified auditors. Furthermore, there has been a lack of independent oversight throughout the audit cycle.
Sebi’s new proposal aims to rectify these issues by implementing an online system that ensures greater accountability. Under the new framework, exchanges will monitor every stage of the audit process, from pre-audit requirements to the submission of the final audit report. Accountants will have to physically visit the offices of stockbrokers, and their visits will be verified through a geolocation tracking system integrated into the web portal. This will also prevent the outsourcing of audit activities, directly involving auditors in the verification of IT systems.
Standardization of the audit process
A crucial part of the proposal is the standardization of the audit process. Exchanges will use the web portal to ensure consistency in the audit report format and to monitor audit progress. The portal records details such as audit start and end dates, systems covered and evidence of physical inspections, with the system automatically recording visits by audit team members and interactions with stockbroker representatives.
The new system also requires auditors to submit evidence of the audit process to the portal, including documents, reports and tested systems. Exchanges will be able to make surprise visits to verify that audits are being conducted correctly and will conduct external reviews of third-party virtual assets used by stockbrokers, such as those of cloud service providers. In cases where auditors fail to meet standards, exchanges will have the power to de-empanel them, ensuring high audit quality across the sector.
Furthermore, the proposed framework includes the establishment of an independent monitoring mechanism by stock exchanges. This will help maintain the integrity of the audit process and ensure that auditors are held accountable. The system will also allow greater interaction between auditors and exchanges, allowing the latter to identify deficiencies before the audit is completed.
The proposal requires exchanges to develop the proposed web portal and provide mechanisms to monitor the entire audit lifecycle. This includes capturing auditor data, verifying physical visits and standardizing audit reports. Auditors will also be subject to stricter requirements, including certification of qualifications and experience, to ensure that only qualified professionals conduct these critical audits.
Sebi has called for comments or suggestions on the proposal by December 26, with the new framework to be implemented at the beginning of the fiscal year 2025-26.
