Investors Beware: Accuracy in Financial Reporting is Not Important

Written by Steven Randall, Partner, Vonya Global

Protecting Your InvestmentThe NASDAQ has announced that it is withdrawing their recent proposal requiring listed companies to have an internal audit function. Those who aggressively fought against the proposal are celebrating. Those who supported the proposal are significantly disappointed. Internal Audit is one of the essential pillars of corporate governance. In the absence of Internal Audit, a system of checks and balances within a company is at risk. Investors should be concerned.

What is Internal Audit?

The Institute of Internal Auditors defines Internal Audit:

    “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”

What does that mean? Simply put: Internal Audit identifies threats to a company’s health and profitability, and helps management make sure those threats do not happen. Much of the Internal Audit responsibility centers on financial reporting risks. It is critical that a company’s financial statements accurately reflect the true financial position of the company so investors can make informed decisions about investing.

Internal Audit also increases corporate accountability and significantly reduces the risk of fraud. Internal Auditors aid in designing systems of internal control and then test to make sure the controls are working as designed. So, whether it is visually inspecting individual transaction files or running analytics on volumes of transaction data, the presence of Internal Auditors enhances control and deters the dishonorable.

The original intentions of NASDAQ were well founded, however now that they have pulled the proposal it makes me concerned whether it should have been proposed in the first place. The NASDAQ released the following statement:

    “NASDAQ remains committed to the highest standards of corporate governance, and believes it is important that listed companies have appropriate mechanisms and processes in place to review risks and the system of internal controls.”

This is an important message, but it is muted based on the fact that the statement was released after their actions said otherwise. I wonder if the “Law of Unintended Consequences” causes lasting ramifications from this decision.

This blog post was authored by Steven Randall. Steve is a Managing Partner with Vonya Global, a premier provider of internal audit co-sourcing, outsourcing, and consulting services; a member of the Institute of Internal Auditors (IIA) Chicago Chapter Board of Governors; a Director of the Adler-Caris Foundation, a not-for-profit dedicated to raising funds for Alzheimer’s Disease research; the President of the Oz Park Baseball Association, a not-for-profit organization dedicated to providing fundamental based baseball in a safe environment in the city of Chicago; and an Advisory Board Member of the Chicago Youth Baseball Initiative, a University of Illinois at Chicago community group dedicated to providing Chicago youth with the opportunity to play baseball in a fun and safe environment, while offering educational experiences on a world-class college campus. If you would like more information about Vonya Global or if you have a question for Steve, you may contact him through this blog, the company website, twitter, or his LinkedIn Profile.