Compliance audit

Registered Investment Advisers have to follow a wide range of SEBI rules on disclosure, record-keeping, fees, and conduct with clients. A compliance audit is the yearly check that confirms whether the adviser has actually been following these rules.

If the audit turns up anything material, a genuine gap in how the adviser has been operating, the adviser is expected to be upfront about it with clients, not to quietly fix it and stay silent.

The workbook states, in its ethics chapter (19.7), that a compliance audit is required yearly, conducted by a Practising Chartered Accountant. Elsewhere, in the records section of the Key Regulations chapter (18.6.12), the workbook describes the same yearly audit as conducted by a member of the Institute of Chartered Accountants of India, the Institute of Company Secretaries of India, or the Institute of Cost Accountants of India, any one of three recognised professional bodies, not Chartered Accountants alone. The workbook does not reconcile these two descriptions; a candidate should be aware of both.

Whichever professional conducts it, the adviser must submit a report of the audit as SEBI specifies, and must disclose to clients any material audit observations that come out of it.

Vantage Investment Advisers Pvt Ltd, with 220 clients, undergoes its annual compliance audit for the 2024-25 financial year. The audit, conducted by a Practising Chartered Accountant, finds that the firm has not been maintaining risk profiling records for 18 of those clients as required.

Because this is a material observation, Vantage is expected to disclose it to the affected 18 clients, rather than fixing the gap silently. Vantage also submits the audit report to SEBI as specified, and takes steps to correct its record-keeping process before the next year's audit.

Chapter 19 (Ethical Issues), section 19.7, 'Learn about addressing annual audit observations', states the yearly requirement and the Chartered Accountant reference. Chapter 18 (Key Regulations), section 18.6.12, gives the broader three-institute version in its discussion of an adviser's record-keeping obligations. Expect a question on how often a compliance audit is required, yearly, and what an adviser must do with material findings, disclose to clients.

• The workbook gives two different descriptions of who may conduct the audit, a Practising Chartered Accountant (Chapter 19) versus a member of any of three institutes, ICAI, ICSI or ICMA (Chapter 18) — state both if a question probes this rather than picking one.
• The audit is required yearly, not on any other cycle — do not assume a quarterly or one-time requirement.
• Material audit observations must be disclosed to clients — the workbook does not require disclosure of every minor finding, only material ones.