Nasdaq Proposes Full Employment for Auditors

By Cydney Posner

This Nasdaq proposal to require listed companies to maintain an internal audit function should be of great interest to many Nasdaq listed companies.

More specifically, the proposal requires that each listed company  "establish and maintain an internal audit function to provide management and the audit committee with ongoing assessments of the Company's risk management processes and system of internal control. The Company may choose to outsource this function to a third party service provider other than its independent auditor. The audit committee must meet periodically with the internal auditors (or other personnel responsible for this function) and assist the Board in its oversight of the performance of this function. The audit committee should also discuss with the outside auditor the responsibilities, budget and staffing of the internal audit function. A Company listed on Nasdaq on or before June 30, 2013, must establish an internal audit function by no later than December 31, 2013. A Company listed after June 30, 2013, must establish an internal audit function prior to listing." The audit committee would have sole oversight responsibility and could not delegate this responsibility to another board committee.

According to the release, the "purpose of the rule is to ensure that listed companies have a mechanism in place to regularly review and assess their system of internal control and, thereby, to identify any weaknesses and develop appropriate remedial measures. The rule is also intended to make sure that the listed company's management and audit committee are provided with ongoing information about risk management processes and the system of internal control."  The rule is also intended to  help  listed companies comply with their federal securities law obligations, particularly the requirement that management assess and report on the effectiveness of internal control over financial reporting. 

Notably, the NYSE has had a fairly long-standing requirement that companies have an internal audit function.  However, many companies listed on Nasdaq are smaller and may not have the necessary internal organization (or extra funding) to develop and support an internal audit function. Although the proposal would allow this function to be outsourced, a company would need to outsource to an auditor other than its independent auditor.  It will be interesting to see if there is much pushback in comments to both the substance and timing of the proposal. 

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