The Nasdaq Stock Market proposed a rule in March 2013 that would require Nasdaq listed companies to establish and maintain an internal audit function. Under the proposal, each company must establish and maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. The audit committee would be required to meet periodically with the internal auditors (or other personnel responsible for this function) and assist the board in its oversight of the performance of this function. The audit committee would also be required to discuss with the outside auditor the responsibilities, budget and staffing of the internal audit function.

The purpose of the proposed rule is to ensure that listed companies have a mechanism in place to regularly review and assess their system of internal control and, thereby, to identify any weaknesses and develop appropriate remedial measures. The proposed rule is also intended to make sure that the listed company’s management and audit committee are provided with ongoing information about the listed company’s risk management processes and the system of internal control.

Under the proposed rule, an issuer may outsource this function to a third party service provider other than its independent auditor; however, the audit committee has the sole responsibility to oversee the internal audit function and cannot allocate or delegate this responsibility to another board committee.

The proposal provides that each company listed on Nasdaq on or before June 30, 2013 must establish an internal audit function by no later than December 31, 2013. Companies listed after June 30, 2013 will be required to establish an internal audit function prior to listing. The New York Stock Exchange has a similar requirement in effect.2