The Institute of Internal Auditors has sent a letter to the Securities and Exchange Commission calling on the SEC to require internal audit functions for all publicly traded companies.
The letter came in response to the SEC’s call for comments on possible revisions to audit committee disclosure rules (see SEC Mulls Changes in Audit Committee Disclosures). Back in July, the SEC issued a 55-page concept release proposing a set of revisions in audit committee disclosure requirements with the goal of improving the information provided to investors about the audit committee’s responsibilities and activities (see SEC Considers Tougher Audit Committee Disclosures). The SEC also expressed interest in receiving comments on other issues pertaining to the audit committee and audit committee reports. The deadline for comments was September 8, the same day the IIA letter was sent.
“In the best interest of the investing public and continued efforts toward restoration of investor confidence, an independent, objective and competent internal audit function is basic and fundamental to effective corporate governance,” wrote IIA president and CEO Richard F. Chambers.
“To this end, we believe the current environment is conducive for the SEC to require internal audit functions for all publicly traded companies,” he added.
The requirement would not be without precedent, the IIA noted. Over a decade ago, the New York Stock Exchange recognized the value of an internal audit function with a direct reporting line to the audit committee. All NYSE-listed companies must have an internal audit function in place, upon or within a year of listing, depending on the circumstances.
The Asian Confederation of Institutes of Internal Auditors also recently published a survey of Asian stock exchange perspectives on internal audit. It found stock exchanges or governments in seven of 10 responding nations mandate internal audit functions for exchange-listed companies.
“Consequently, we strongly believe the time has come to formally recognize the value of an effective internal audit function for all publicly listed companies as a matter of basic good governance,” Chambers wrote. “At a minimum, publicly listed companies on exchanges that don’t require internal audit should be required to disclose why they do not support internal audit as necessary to effective corporate governance.”
Chambers wants the new requirement to include internal audit conduct in accordance with globally recognized standards, such as those issued by the IIA. He also called for two related disclosure requirements: an audit committee disclosure on the internal audit function’s stature, independence, and resources; and the audit committee’s disclosure on the internal audit function’s performance to help investors more effectively understand and evaluate a key element of audit committee performance.
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