NASDAQ Wants You to Hire an Internal Auditor

“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.” (NASDAQ)

Earlier this month, the NASDAQ Stock Market filed a proposed new rule with the Securities and Exchange Commission that would require all NASDAQ-listed companies to maintain an internal audit function.

Why the new requirement? From David Kravitz and Mark Wood of law firm Katten Muchin Rosenman:

“NASDAQ stated in its rule proposal that the purpose of the new rule is to ensure that a listed issuer has a mechanism in place to regularly review and assess its system of internal control, and to ensure that the listed issuer’s management and audit committees are provided with current information about risk management processes and systems of internal control. Additionally, NASDAQ believes that the rule will assist listed issuers in complying with their federal securities law obligations to maintain and evaluate, with the participation of their principal executive and financial officers, the effectiveness of the internal control over financial reporting.”

If approved, all companies listed on NASDAQ prior to June 30, 2013 would be required to have the internal auditing function in place by the end of the year.

For your reference, three takeaways:

1. You can outsource the work:

“Despite the rule’s requirement of an internal audit function, the proposed language permits companies ‘to outsource this function to a third party service provider other than its independent auditor.’ So, while the rule permits the internal audit work to be done by an outside third party, the company cannot engage the same auditing firm as both its internal and external auditor. In other words, the company needs both an independent outside auditor that cannot act as the inside auditor and an inside auditor that can be an outside auditor as long as it’s not the independent outside auditor.” (Orrick)

2. You cannot, however, outsource the oversight:

“[T]he audit committee would have the sole responsibility to oversee the internal audit function and would not be able to allocate or delegate this responsibility to other committees of the company’s board of directors… The audit committee must meet periodically with the internal auditors (or other personnel responsible for this function) and assist the board of directors 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.” (Holland & Knight)

3. When to start? Now:

“Companies without an internal audit function should immediately begin planning to implement one before the end of 2013, while those with an internal audit function should review their existing policies and procedures to ensure that they comply with the proposed rule.” (Wilson Sonsini)

The updates:

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