The Internal Audit Function: A Prerequisite for Good Governance

• Published date: 01 January 2017
• Date: 01 January 2017
• DOI: http://doi.org/10.1002/jcaf.22246

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© 2017 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22246

The Internal Audit Function:

A Prerequisite for Good Governance

Cecily Raiborn, Janet B. Butler, Kasey Martin, and Mina Pizzini

INTRODUCTION

In 2013, the

NASDAQ Stock

Market LLC (NAS-

DAQ) filed a pro-

posal with the Securi-

ties and Exchange

Commission (SEC)

to require NASDAQ–

listed companies to

establish and main-

tain an internal audit

(IA) function (SEC,

2013a). According to

the proposal, the pur-

pose of the IA func-

tion is “to provide

management and the

audit committee with

ongoing assessments

of the Company’s

risk management processes

and system of internal control”

(SEC, 2013a, p. 1). The NAS-

DAQ proposal, which has since

been withdrawn, was similar to

a New York Stock Exchange

(NYSE, n.d.) requirement for

listed companies.

Upon the proposal’s

release, some NASDAQ com-

panies protested, claiming

that the requirement would be

unduly burdensome. Pros and

cons enumerated in the letters

are summarized in Exhibit 1

(SEC, 2013b). The top three

reasons against the proposal

were cost of implementation,

time commitments required of

organizational employees, and

redundancy of IA to a firm’s

external audit process. The

NASDAQ voluntarily withdrew

the proposal in May

2013 (Mont, 2013).

Many of the

stocks listed on

stock exchanges

other than the

NYSE are from

relatively young,

high-growth technol-

ogy and Internet-

based companies.

Such companies

have much to gain

from an IA func-

tion, even if it is

not stock exchange

required, because

they are more sus-

ceptible to internal

control weaknesses

and fraud than are

larger, more established, and

financially stronger companies

(Ashbaugh-Skaife, Collins, &

Kinney, 2007; Association of

Certified Fraud Examiners

[ACFE], 2016; Doyle, Ge, &

McVay, 2007). The nature and

content of the negative com-

ments related to the NASDAQ

proposal arguably demonstrate

some managers’ lack of experi-

ence with the differing goals

AQ1

In 2013, the NASDAQ Stock Market LLC (NASDAQ)

establish and maintain an internal audit (IA)

function. Comment letters received on the pro-

posal were overwhelmingly negative. The top

three reasons against the proposal were cost of

implementation, time commitments required of

organizational employees, and redundancy of IA to

a firm’s external audit process. This article delin-

eates differences between internal and external

audit responsibilities, identifies the benefits of

internal auditing, highlights the role that internal

auditors play in corporate governance and risk

management, demonstrates how IA assurance

and consulting activities add organizational value,

and discusses cost-effective options for imple-

menting an IA function.

© 2017 Wiley Periodicals, Inc.

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