Voluntary Adoption of Internal Audit by NASDAQ Firms and Its Impact on Internal Control Reporting

ABSTRACT NASDAQ firms are not required to have an internal audit function. We exploit this voluntary setting to provide further insight into internal audit's role as a governance function. We search proxy statements and other sources to identify whether NASDAQ firms have an internal audit function. Firms with a higher risk profile are more likely to have an internal audit function, whereas smaller/resource constrained firms are less likely to invest in internal audit. NASDAQ firms with an internal audit function are more likely to report a material weakness under Sarbanes‐Oxley Section 302 or 404, indicating that internal audit reduces information asymmetry by communicating internal control issues.