The Securities and Exchange Board of India (Sebi) has proposed a new online system to improve the monitoring and supervision of stockbrokers’ system audits. This proposal, aimed at enhancing audit quality and accountability, will create a web-based platform for stock exchanges to oversee the system audit process for brokers in real-time. It comes as part of Sebi’s ongoing efforts to strengthen technology governance in India’s capital markets.
The proposed online mechanism seeks to address several risks identified in the current audit process, which has been in place since 6 November 2013. These risks include audits conducted without physical visits to stockbrokers’ premises, poor audit quality due to insufficient sample sizes and inadequate evidence, and audits performed by non-qualified auditors. Additionally, there has been a lack of independent supervision throughout the audit lifecycle.
Sebi’s new proposal aims to rectify these issues by implementing an online system that ensures greater accountability. Under the new framework, stock exchanges will monitor every stage of the audit process, from pre-audit requirements to the final audit report submission. Auditors will be required to visit stockbrokers’ offices physically, and their visits will be verified through a geo-location tracking system integrated into the web portal. This will also prevent the outsourcing of audit activities, ensuring auditors are directly involved in the verification of IT systems.
Standardization of the audit process
A critical part of the proposal is the standardization of the audit process. Stock exchanges will use the web portal to ensure consistency in the audit report format, and to monitor the audit’s progress. The portal will capture details such as the audit start and end dates, the systems covered, and evidence of physical inspections, with the system automatically logging audit team members’ visits and interactions with stockbrokers’ representatives.
The new system also mandates that auditors submit evidence of the audit process on the portal, including records, reports, and systems tested. Exchanges will be able to perform surprise visits to verify that audits are carried out properly and will conduct offsite assessments of third-party virtual assets used by stockbrokers, such as those provided by cloud service vendors. In cases where auditors fail to meet standards, stock exchanges will have the authority to de-empanel them, ensuring high audit quality across the sector.
Furthermore, the proposed framework includes the creation of an independent supervisory 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 for more interaction between auditors and exchanges, that will help the latter to identify deficiencies before the audit is finalized.
The proposal requires stock exchanges to develop the proposed web portal and provide mechanisms to monitor the entire audit lifecycle. This includes capturing auditor details, verifying physical visits, and standardizing audit reports. Auditors will also be subject to more stringent requirements, including certification of qualifications and experience, to ensure only qualified professionals conduct these critical audits.
Sebi has called for comments or suggestions on the proposal by 26 December, with the new framework set to be implemented at the starting of the 2025-26 fiscal year.
