The Institute of Internal Auditors, along with a coalition of investor, governance and professional organizations, is asking the Securities and Exchange Commission to reject a New York Stock Exchange proposal that would allow newly listed companies to take up to five years to establish an internal audit function.
The IIA argues such a move would be a major step backward for good governance and would lead to a critical gap in oversight for public companies. The pushback comes amid a broader reconsideration of financial reporting and assurance requirements for public companies.
"Five years is far too long for a public company to operate without the ongoing, objective assurance an internal audit function provides," said IIA president and CEO Anthony Pugliese in a statement Wednesday. "The Exchange has offered no evidence for this change, and the protections it points to do not apply to most of these companies. This requirement has served investors well for more than two decades, and it has been relaxed once already. Extending it fivefold would be a significant step backward for good governance."
The IIA sent a
The IIA has joined a coalition of groups that have filed a
Former IIA president and CEO Richard Chambers, who is now a senior advisor of risk and audit at Optro, also wrote about his concerns about the
Last week, Pugliese urged attendees at the IIA's Financial Services Exchange conference in New York to express their concerns to the NYSE about the proposal.
The IIA pointed out that the internal audit listing requirement was adopted as part of the NYSE's post-Enron governance reforms and has provided an important safeguard for investors in newly listed companies for more than two decades. The NYSE's filing is proposing to extend the one-year transition period to five years while offering no data on the amount of affected companies or the claimed burden, nor any analysis of any estimated savings or the consequences for investors.
Even when the NYSE added the current one-year transition period in 2013, the coalition noted, the SEC approved that delay only after noting that it was "limited in duration" and that that every company would still have the function within one year after listing.
"A five-year absence is neither limited nor prompt," said the coalition's letter. "And a young public company does not need less of this assurance than a mature one. It needs it at a time when systems, controls, and governance practices are still being built and decisions are being made that will shape the company for years — and when its risks, operational, technological and financial, move faster than any annual reporting cycle."
The coalition's letter argues that the requirement is a basic protection investors count on from the earliest days of a company's public life and that independent assurance over a newly public company's risks and internal controls is foundational. The IIA's position is in keeping with the objection it filed when the current one-year transition period was adopted in 2013. The IIA said it stands ready to work with the NYSE and the SEC on any path supported by evidence and broad stakeholder input.
The IIA argued in its comment letter that the safeguards cited in the NYSE's own filing do not fill the gap. Chief among them is the Sarbanes-Oxley auditor attestation requirement, from which most newly public companies are already exempt for up to five years following their initial public offering, and which a separate pending SEC proposal would remove for every newly public company. Under the NYSE proposal, a typical new issuer could trade for five years with no internal audit function and no independent attestation over its internal controls, during the same years its systems and controls are being built.
