Nasdaq Proposes Internal Audit Requirement

5/2/2013

May 9, 2013

All entities listed on the Nasdaq Stock Market LLC (Nasdaq) would be required to establish and maintain an internal audit function if a recently proposed rule change is implemented.

Nasdaq filed the proposed rule, Rule 5645, with the U.S. Securities and Exchange Commission (SEC), on Feb. 20, 2013. If approved, the rule would require the internal audit function of any company listed on Nasdaq to provide management and the audit committee with ongoing assessments of the risk management practices and system of internal control of the entity.

The proposal requires the audit committee to meet periodically with the entity’s internal auditors and assist the board with overseeing the performance of the internal audit function. The audit committee would have sole responsibility for the internal audit function and could not allocate or delegate the responsibility.

The Purpose of the Proposal

Nasdaq has proposed this rule for the following reasons:

  1. To provide management and audit committees with ongoing information about the risk management processes and internal control systems of their listed entities
  2. To ensure that listed entities have a mechanism in place for regularly reviewing and assessing their systems of internal controls and thereby identifying weaknesses and developing appropriate remedial measures
  3. To assist entities’ efforts to comply with their obligations under federal securities law

 

The rule permits an entity to outsource the internal audit function to a third-party service provider other than its independent auditor. If implemented, the new rule would align Nasdaq’s internal audit requirements with those of the New York Stock Exchange, which established the requirement for an internal audit function in 2003.

The Timeline

An entity listed on Nasdaq on or before June 30, 2013, would be required to establish an internal audit function no later than Dec. 31, 2013. An entity listed after June 30, 2013, would need to establish an internal audit function before being listed. Consistent with best practices, many listed entities already have an internal audit function in place, but Nasdaq aims to provide sufficient time to entities that have not yet established the function.

Comments on the proposal were due March 29, 2013. On April 18, SEC Release No. 34-69402 extended the time the SEC has to review the comments it has received. The SEC will make a final determination on the proposed rule change by June 6.

For More Information
Tony Klaich
415.946.7447
tony.klaich@crowe.com