NYSE Proposes Extending Internal Audit Compliance Period to Five Years

The NYSE proposed extending the transition period for newly listed companies to establish an internal audit function from one year to five years.

The proposal explained that the internal audit function gives management and the audit committee ongoing assessments of the issuer's risk management processes and internal controls, and that it may be outsourced to a third party other than the issuer's independent auditor.

In the proposal, which would amend NYSE Listed Company Manual Section 303A.00 ("Introduction") and Section 303A.07 ("Audit Committee Additional Requirements"), the exchange said issuers have cited competing business and regulatory obligations, along with the challenges of building an internal audit function while adjusting to life as a newly public company, as reasons for extending the compliance period. The NYSE said the additional time will allow a new slate of directors to assess an issuer's operations and design a more effective internal audit function.

The exchange argued that other safeguards will continue to protect investors during the extended transition, including the requirement that all listed issuers maintain an independent audit committee under NYSE Listed Company Manual Section 303A.06 ("Audit Committee") and obligations under the Sarbanes-Oxley Act requiring management and auditor assessments of internal controls. The NYSE characterized its internal audit requirement as supplemental to the Sarbanes-Oxley protections.

The NYSE also noted that Nasdaq does not require listed companies to maintain an internal audit function at all, and argued that even with the extended transition period, its internal audit rule would remain more stringent than Nasdaq's.

Comments on the proposal are due 21 days after publication in the Federal Register.