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IIA Seeks SEC Requirement for Internal Audit

SEC urged to mandate internal audit for all publicly traded companies

ALTAMONTE SPRINGS, Fla. (Sept. 9, 2015) — The Institute of Internal Auditors (IIA), the world’s leading advocate and standard setter for the internal audit profession, this week called on the U.S. Securities and Exchange Commission to require internal audit functions for all publicly traded companies.

“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, CIA, QIAL, CGAP, CCSA, CRMA.

The letter is part an IIA response to the SEC’s call for comments on possible revisions to audit committee disclosure rules. The call for the new internal audit mandate was precipitated by the SEC’s expressed interest in receiving comments on other issues pertaining to the audit committee and audit committee reports.

“To this end, we believe the current environment is conducive for the SEC to require internal audit functions for all publicly traded companies,” according to the letter.

The requirement would not be without precedent. More than 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.

Recognizing the value of internal audit is not restricted to U.S. stock exchanges. The Asian Confederation of Institutes of Internal Auditors 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.

Additionally, a recent Group of Thirty (G30) report calling for comprehensive reform of banking conduct and culture recognized the importance of internal audit. The report called for internal audit functions that are robust, independent, well-staffed and possessing a “clear mandate to examine adherence to standards.”

“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.”

The new requirement should include internal audit conduct in accordance with globally recognized standards, such as those issued by The IIA. The letter also advocates 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.

The three IIA-recommended actions will help investors more effectively understand and evaluate a key element of audit committee performance.