While the guidelines increase trust in financial disclosures, they also pose significant obstacles.
Stockbrokers have asked the market regulator to loosen limits on employing audit firms, claiming that they are discriminatory and limiting their alternatives.
The Association of National Exchanges Members of India (ANMI) claimed in an email to the Securities and Exchange Board of India (SEBI) on August 17 that the eligibility requirements for audit companies that brokers and clearing entities might use are discriminatory. The email has been examined by Moneycontrol.
According to a circular published by Sebi in May, stock exchanges and the regulator would only accept internal audit reports certified by an impaneled auditor. According to the regulation, an audit company must always have at least five partners. At least two partners must be full-time, and the businesses must be Sebi-approved.
“There are currently very few audit firms with five partners, the majority of which are located in the Mumbai and Delhi region.” Members who are not headquartered in certain places may have difficulty locating such audit companies,” ANMI stated.
Sebi also requires the auditor to have at least five years of auditing experience, ideally in the securities markets. The auditors, as well as at least one partner or staff, should be a Certified Information Systems Auditor (CISA) or qualified with a Diploma in Information Systems (DISA).
According to ANMI, relatively few audit firms have CISA or DISA-certified partners since the majority of them focus on internal audits rather than system or cyber-security audits.
Some challenges
“Audit firms that meet all eligibility criteria are not based in small cities and towns, resulting in higher costs for small and medium-sized brokers,” said a broking business executive who requested anonymity.
For these reasons, ANMI believes that the requirement for audit companies to have at least five partners is discriminatory and calls into doubt 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.”
