IIA urges better oversight of prediction markets

The Institute of Internal Auditors is calling on lawmakers and policymakers to strengthen their oversight of prediction markets such as Kalshi and Polymarket, which have grown in popularity in recent years but also provoked controversy.

The IIA sent letters Thursday to congressional leaders and the Commodity Futures Trading Commission urging them to require registered prediction market exchanges to implement a formal, documented system of risk-based internal controls designed to prevent and detect insider trading on material non-public information, market manipulation, conflicts of interest and other risks to the public. It asked lawmakers to pass legislation requiring prediction market exchanges to maintain an independent, properly structured internal audit function. 

The IIA pointed to some of the risks associated with prediction market platforms, including the potential misuse of material non-public information, weaknesses in outcome integrity, and gaps in surveillance and accountability mechanisms.

"Prediction markets present novel opportunities, but they also introduce familiar risks seen across financial systems," said IIA president and CEO Anthony Pugliese in a statement Friday. "Without strong governance and independent oversight, these platforms risk undermining public trust in markets and institutions more broadly."

Prediction markets have been lobbying lawmakers to prevent such regulations, spending at least $1.84 million on lobbying during the first quarter of 2026, up over 60% from the $1.1 million spent in the first quarter of 2025. The markets have grown rapidly in popularity.  Last year, the industry was generating $2 billion in annual revenue, and that amount is expected to grow to $10 billion by 2030, according to analysts at Citizens Financial Group.  However, they have also attracted concerns over insider trading, as when a U.S. special forces soldier who participated in the capture of Venezuelan President Nicolas Maduro was accused of betting on the invasion on Polymarket and profiting by over $409,000. 

Accounting firms are starting to help clients deal with the tax implications of prediction market trading. It's unclear which tax forms should be used to report the winnings or losses as coming from gambling or trading.

"What is the form over substance?" said James Creech, a specialist with Baker Tilly's tax practice, in an interview last December. "It's the same bet, but one was reported on a W-2G versus a 1099-B. Practically, what's the difference? There's a lot of behavioral shifts driving this stuff toward calling it a financial product and regulated by the CFTC under this broad prediction market-like analysis. Is that form over substance really going to be so meaningful? And at what point does the IRS step in?"

He noted that the prediction markets are regulated by the CFTC and some of the companies have claimed that form of federal regulation thereby preempts state laws on gambling. "They're offering gambling or things that look like gambling in places that don't normally allow online gambling," he added.

The IIA pointed out that effective oversight requires more than rules alone. Durable frameworks need to ensure that controls are not only established, but also consistently followed, tested and enforced through independent assurance.

Among its recommendations, the IIA called for:

• Formal internal control frameworks at prediction market platforms to address risks such as insider trading, market manipulation and conflicts of interest;
• Independent, properly structured internal audit functions at Designated Contract Markets and regulated exchanges, reporting to boards or equivalent governing bodies;
• Enhanced regulatory expectations aligned with established financial market standards; and
• A Government Accountability Office study to assess existing control environments and identify gaps across platforms.

The IIA observed that prediction markets are inherently vulnerable to risks driven by information asymmetry and evolving participation models. That means policymakers should focus not only on limiting harmful activity, but also on ensuring the underlying systems of control, transparency, and accountability are sufficient to make those limits meaningful.

Internal audit plays a critical role in this framework by providing independent, objective assurance on governance, risk management and internal controls, the IIA noted. Unlike compliance functions, internal audit operates with direct reporting lines to governing bodies, ensuring that risks and control failures are elevated independently without management interference.

The IIA's recommendations draw upon globally recognized standards within its International Professional Practices Framework, which is widely used across regulated financial institutions and referenced by U.S. regulators.

In its latest annual North American Pulse of Internal Audit survey, the IIA found that internal auditors have been dealing with cuts in their budgets this past year.

"It showed that last year was the toughest year for internal audit of any year," said Richard Chambers, a former IIA president and CEO who is now senior advisor of risk and audit at Optro (formerly known as AuditBoard) and chair of the UNICEF Audit Advisory Committee, in an interview last month. "I started that survey 18 years ago, and it was the worst year of any of those 18 years that wasn't either the great financial crisis or COVID. There's no obvious impetus for it, unless you start to say, is this the beginning of the quest for the AI dividend? I don't know. That's pure speculation. We're doing some more research right now at Optro. We want to understand what's really fueling this and how are people taking these cuts? Are they filtering down into staffing? Are they cutting back on technology? Are they cutting out third-party service providers? What's happening when budgets are getting cut like that?"