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Brokers seek relaxation on SEBI audit firm rule, term it ‘discriminatory'

September 1, 2023 

While the norms bolster confidence in financial disclosures, they also present potential challenges.

Stock brokers have sought a relaxation of rules proposed by the market regulator on hiring of audit firms, saying they are discriminatory and narrowed the options available to them.

The eligibility criteria for audit firms that brokers and clearing corporations can hire are discriminatory, the Association of National Exchanges Members of India (ANMI) asserted in an email to the Securities and Exchange Board of India on August 17. Moneycontrol has reviewed the email.

The stock exchanges and the regulator will only accept internal audit reports certified by an empanelled auditor, Sebi said in a circular issued in May. The regulator said an audit firm must have at least five partners at all times. At least two partners must be full-time and the firms must be empanelled with Sebi.

“There are very few audit firms which currently have five partners, most of which are located in the Mumbai and Delhi region. Members who are not based in these locations might face problems in finding such audit firms,” ANMI said.

Sebi also wants the auditor to have a minimum of five years of experience in carrying out audits, preferably in the securities markets. The auditors and/or at least one partner/employee should be a Certified Information Systems Auditor (CISA) or qualified with a Diploma in Information Systems (DISA).

ANMI said very few audit firms have partners with CISA or DISA certification as most of them focus on internal audits and not system or cyber-security audits.

Some difficulties
“Audit firms that meet all eligibility criteria are not based in small cities and towns, leading to higher costs for small- and medium-size brokers,” said the executive of a broking firm, requesting anonymity.
For these reasons, ANMI said the insistence on audit firms with at least five partners is discriminatory and questions the competence and integrity of other audit firms.

Legal experts acknowledged that the eligibility criteria may present some difficulties.

“While this bolsters confidence in financial disclosures, it also presents potential challenges: narrowing broker choices, escalating audit costs, and pressing smaller audit practices to evolve swiftly,” said Sonam Chandwani, managing partner at KS Legal & Associates. “Sebi might believe that stringent regulations could lead to enhanced audit quality, reduced risks, and higher confidence in financial reporting.”

Why was this put in place?
Moneycontrol learnt from market participants that lapses were found in internal audits of several broking firms over the past few years.

“Sebi once issued an advisory naming a certain audit firm and asked brokers to steer clear of it,” one person said. “Moreover, many small brokers fake their audit reports and get it rubber-stamped.”

Audit lapses have led to misuse of client funds. Brokers have been found to mix clients’ funds with their own for their proprietary usage.

Sebi recently banned IIFL Securities from accepting new clients for two years over misuse of funds. However, the Securities Appellate Tribunal stayed the order.

More loopholes
The National Stock Exchange of India said in May it would provide an online system for submission of applications for auditor empanelment and this would be communicated to the members.

“We have not received that yet,” said the founder of a decade-old broking firm, requesting anonymity.

Even after finding audit firms that meet all the eligibility criteria, some brokers feel hampered by the lack of a proper procedure to empanel the firms.

“And the date for the bi-annual internal audit is approaching soon, in September,” the founder added.

Most brokers told Moneycontrol that the criteria for certified auditors are a welcome change, but the five-partner norm was an “artificial barrier.”


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