The Securities and Exchange Board of India (SEBI) issued a draft circular inviting public comments on the “Management Statement and Auditor’s / Independent Practitioner’s Report on Digital Assurance based on Information Obtained from External Data Repositories.” This initiative, developed in collaboration with the Institute of Chartered Accountants of India (ICAI), aims to bolster financial reporting by incorporating digital assurance mechanisms.
The Rise of Digital Assurance
The need for digital assurance has grown as more financial information is being sourced and stored in digital formats. The collaboration between SEBI, the Auditing and Assurance Standards Board (AASB), and the Digital Accounting and Assurance Board (DAAB) of ICAI has resulted in a “Technical Guide on Digital Assurance.” This guide offers auditors detailed instructions on how to leverage technology and access digitally available audit evidence. The idea is to provide auditors with better tools to evaluate and confirm the authenticity and accuracy of financial data, especially when that data is drawn from external repositories.
The Core of the Draft Circular
At the heart of the SEBI draft circular is the proposal to mandate a separate report on digital assurance as part of the financial statements filed by listed companies. This will involve creating a “Management Statement” and an “Auditor’s/Independent Practitioner’s Report” based on data obtained from external repositories. Essentially, this report will validate the digital evidence used in the financial audits, ensuring that the financial statements are accurate and trustworthy.
One critical aspect of this draft is that while it encourages auditors to use digital tools, it does not compel management teams of listed entities to provide auditors with access to external data repositories. The auditors will use available digital data, but the onus of sharing this information does not fall on the company itself. This distinction ensures that the digital assurance process remains streamlined and does not place undue burdens on companies.
Objectives of Digital Assurance
The overarching goal of this proposed mandate is to increase the transparency and quality of financial reporting by listed companies. By requiring a specific digital assurance report, SEBI aims to:
- Enhance Investor Protection: A transparent and verifiable digital audit increases trust and safeguards the interests of investors.
- Improve Disclosure Standards: The report will ensure that companies disclose their digital assurance processes clearly, adding another layer of reliability to financial statements.
- Boost Enforcement and Monitoring: With higher quality reporting and clearer digital evidence, regulatory bodies can more effectively monitor and enforce compliance with financial regulations.
Cost Considerations
According to feedback from ICAI, the cost of producing this digital assurance report is expected to be relatively low compared to the overall cost of auditing. This is an important factor, as it reassures companies that adopting digital assurance will not unduly increase financial burdens.
Public Consultation and Feedback
SEBI is currently seeking public feedback on the draft circular, with comments due by February 24, 2025. Stakeholders, including auditors, companies, and investors, are encouraged to review the proposed reporting format and provide their thoughts through SEBI’s online platform. This feedback will play a crucial role in shaping the final version of the circular.
