DSE moves to tighten brokerage audits
DSE suspects auditors’ failure to reveal the true financial health of brokerage houses
To strengthen oversight of brokerage firms and boost transparency, the Dhaka Stock Exchange (DSE) plans to upgrade its panel of auditors to address previous audit shortcomings that obscured the true financial condition of some broker-dealers.
On 1 July, the bourse approved new guidelines for enlisting audit firms on its panel, updating criteria for auditing the financial statements of DSE Trading Right Entitlement Certificate (TREC) holders, primarily broker-dealer firms.
With a provision to automatically include auditors already enlisted with Bangladesh Bank (BB) and the Bangladesh Securities and Exchange Commission (BSEC), the DSE has invited applications from other eligible audit firms for panel enlistment, with a deadline of 15 July.
Usually, the two regulators, BB and BSEC, maintain separate panels of auditors to audit banks and non-banks, and listed companies, respectively.
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In recent years, Tamha Securities Ltd, Banco Securities Ltd, Crest Securities Ltd, and Shah Mohammad Sagir & Company Ltd were accused of embezzling around Tk300 crore of investor money using a fraudulent software database.
The DSE suspects auditor's failure in finding the true picture of the brokerage houses' financial health.
"A strong panel of auditors is essential to understand the true financial condition of brokerage houses and to ensure transparency and accountability. This is because, in many cases, customer funds embezzlement has occurred at brokerage firms due to auditors failing to perform their duties properly," said Mominul Islam, chairman of the DSE.
Auditors are entrusted with providing insights into the financial health of businesses, offering critical information on financial conditions, operations, performance, and cash flow.
He said, "Several incidents have occurred at some brokerage houses involving the embezzlement of customer funds. These incidents have had a negative impact on the capital market and eroded investor confidence."
"Now we have upgraded the guidelines of auditor enlistment for the brokerage firms to get a true and fair picture of the financials of the houses," the DSE chairman added.
The DSE initially formed a panel of auditors in June 2021, comprising 61 audit firms. This panel includes auditors enlisted by Bangladesh Bank and the Bangladesh Securities and Exchange Commission (BSEC), along with six additional auditors.
As per the rules, DSE-enlisted brokerage firms or TREC holders are required to appoint statutory auditors from this panel to audit their annual financial statements.
As per the new guideline, DSE's brokerage firms will appoint their statutory auditor from the panel of auditors for a consecutive period not exceeding three years. Any auditor delisted from the panels of Bangladesh Bank or BSEC, firms that fail to secure Financial Reporting Council enlistment, or unethical practitioners will be barred from enlistment.
Also, if the audited financial statements of a stock broker-dealer are found to be prepared without following legal provisions and securities laws, and do not reflect the true and fair financial position, the auditor will also be barred from the panel, as per the updated guideline.
A DSE official said, "In the past, Moshihor Securities Limited, Banco Securities, Crest Securities, and Tamha Securities embezzled hundreds of crores of taka from clients, yet the auditors' reports did not reveal any significant irregularities. As a result, the DSE was unable to grasp the true state of these brokerage houses, ultimately leading to losses for investors."
He added, "The amount disbursed from the Investor Protection Fund to cover those losses was very minimal. That is why the DSE is now putting greater emphasis on ensuring investor protection, as well as transparency and accountability in the financial reporting of brokerage houses — so that no investor has to suffer such losses again."
