INTERNAL AUDIT OF A STOCK BROKER

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rahul dave (Querist)
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17 November 2008 what are the various points to be covered for half yearly audit of a stock broker as per sebi guidelines

CA RAMESH KUMAR AHUJA

CA RAMESH KUMAR AHUJA (Expert)
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18 November 2008 SEBI issued a circular to the various stock exchanges requiring mandatory internal audit for their stock-brokers / clearing members on a half-yearly basis.

The scope of the said audit includes the existence, scope and efficiency of the internal control system, compliance with the provisions of the SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956, SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, circulars issued by SEBI, agreements, know-your-customer requirements, by-laws of the exchanges, and data security and insurance in respect of the operations of stock brokers / clearing members. The first such audit period will be from October 1, 2008 to March 31, 2009.

Following the SEBI circular, it is expected that the respective stock exchanges will come out with detailed guidelines in this regard. On the audit front, it is expected that the Institute of Chartered Accountants of India (ICAI) will also come up with guidance notes for its members for the conduct of audit.

The requirement provides an opportunity for strengthening controls and to reduce risks under volatile market conditions.

Internal Audit

Instead of considering the SEBI directive for internal audit as a compliance requirement, it should be used as a tool to strengthen internal controls and improve risk management. The areas that are of the utmost importance wherein the internal audit can add value are:

Client acceptance and anti-money laundering compliances

Client exposure and margin policy aspects

Sub-brokers and franchisee exposure and adequacy of margins

Treasury management

IT systems’ review and IT security aspects

Business continuity and disaster management

Designing budgetary control system with profit and cost centres

Revenue audit based on contractual arrangements with client and revenue sharing agreement with the franchisees/sub brokers

Manpower cost review including performance based incentives

Review of operating costs, including infrastructure and IT

Compliance with applicable regulations, such as those of SEBI, stock exchange regulations, Securities Transaction Tax, Service Tax, Income Tax, and Companies Act (in case of corporate entities).