17 Apr Nasdaq Proposes Mandatory Internal Audit Function

At the end of March, the Nasdaq Stock Market proposed requiring a permanent internal audit function at all Nasdaq-listed companies to ensure that financial controls are adequate. This is already a requirement of companies listed on the “big board” of NYSE Euronext. As we know, the Sarbanes-Oxley Act of 2002, passed in the wake of the scandals at Enron and WorldCom, both known as clear failures of internal controls, has a heavy focus on companies’ attention to the issue.

Since the passage of SOX, there has been some relief granted for smaller companies to avoid the significant cost of hiring an outside auditor to attest to the adequacy of internal financial controls. And last year the Jumpstart Our Business Startups (JOBS) Act included a provision giving any newly public company with less than $1 billion in revenues the option to avoid this cost as well.

The proposed Nasdaq requirement, however, seems reasonable for companies seeking the benefits of a listing on a national securities exchange. They may still be exempt from an outside auditor looking in, but requiring the independent audit committee of the board to work with internal auditors makes sense, especially since the CEO and CFO have to personally certify in every public filing that they believe they have maintained appropriate controls. And unlike the outside auditor function, whose cost has the risk of skyrocketing, presumably audit committees and companies hiring internal auditors can manage the expense.