Insights

Preparing for the proposed Nasdaq internal audit rule

May 13, 2013

Management Liability/D&O

A recently proposed new rule for Nasdaq-listed companies would require these companies to implement an internal audit function. While it’s important for these businesses to be aware of the potential changes in internal auditing practices, this rule isn’t the regulatory game changer that some have implied. Indeed, a version of the proposed rule for Nasdaq-listed companies already exists for NYSE-listed companies.

The goal of the proposed rule is to ensure that companies have in place a system that allows them to review internal controls with a view to risk management. This would ensure that management teams and audit committees are consistently provided with information that allows them to make the best possible decisions and effectively mitigate risk.

What does the rule require?
The proposed rule would require Nasdaq-listed companies to establish and maintain an internal audit function. Companies would be permitted to choose to outsource this responsibility to a third-party provider (but not their independent auditor, of course). The internal audit function would report to the audit committee.

The proposal was submitted to the SEC and was supposed to be decided upon by April 22. However, in order to review the large number of comments sent by listed companies, the Commission was forced to push its decision back until June 6. If passed, Nasdaq-listed companies would need to comply with the rule and create an internal audit function no later than December 31, 2013. Companies seeking to become Nasdaq-listed? on or before June 30 of this year will be required to have these operations in place before listing.

What impacts will this rule have?
Some organizations are hesitant about the SEC’s expected approval of the rule, and any regulatory change should be approached cautiously and deliberately. This proposed regulatory change is likely to further bolster the efforts undertaken by most companies who already take very seriously concepts like internal controls and the testing of these controls. While some companies may be skeptical about the potential for additional regulation and compliance-related costs, in the end the implementation of such a rule could end up being more positive than many businesses anticipate by making them better informed about potential risks and operations.

If the rule is approved, it seems likely that the final version will be modified compared to the current proposal given the amount of feedback that the proposal has generated. For example, the final version could contain exceptions for smaller firms that track other exemptions the Nasdaq listing rules afford to smaller companies.

Nasdaq-listed companies that do not already have an internal audit function should consider what implementing one would involve. By consulting their auditors and outside counsel, these companies should be able to ensure compliance with the proposed changes in a timely manner.

The views expressed in this blog are solely those of the author. This blog should not be taken as insurance or legal advice for your particular situation. Questions? Comments? Concerns? Email: phuskins@woodruffsawyer.com.

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All views expressed in this article are the author’s own and do not necessarily represent the position of Woodruff-Sawyer & Co.

Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

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Priya Cherian Huskins

Senior Vice President, Management Liability

Editor, Management Liability/D&O

Priya is a recognized expert and frequent speaker on D&O liability risk and its mitigation. In addition to consulting on D&O insurance, she counsels clients on corporate governance matters, including ways to reduce their exposure to shareholder lawsuits and regulatory investigations. Priya serves on the board of an S&P 500 public company and a large private company and has an impressive list of publications, speaking engagements, and awards for her influence and expertise in the industry. 

415.402.6527

LinkedIn