IIA Urges Stronger Governance, Internal Controls, and Independent Audit for Prediction Markets

The IIA's Stance on Prediction Market Oversight

The Institute of Internal Auditors (IIA) has proactively addressed the emerging landscape of prediction markets, urging U.S. policymakers and regulators to establish comprehensive oversight. The IIA's core message, conveyed through formal letters to the U.S. Commodity Futures Trading Commission (CFTC) and Congressional leadership, emphasizes the critical need for robust governance, stringent internal controls, and independent internal audit functions within these platforms. This call to action stems from the recognition that while prediction markets offer novel opportunities, they also introduce significant risks akin to those found in traditional financial systems.

Key Risks and the Role of Internal Audit

The IIA identified several key risks inherent in prediction markets, including the potential for misuse of material non-public information, vulnerabilities in outcome integrity, and deficiencies in surveillance and accountability mechanisms. Anthony J. Pugliese, President and CEO of The IIA, underscored that without strong governance and independent oversight, these platforms could erode public trust. The IIA advocates for a framework where controls are not only established but also consistently followed, tested, and enforced through independent assurance, highlighting that rules alone are insufficient.

Recommendations for a Robust Framework

To mitigate these risks, the IIA put forth several recommendations:

• Implementation of formal internal control frameworks at prediction market platforms to address issues like insider trading, market manipulation, and conflicts of interest.
• Establishment of independent, properly structured internal audit functions within Designated Contract Markets (DCMs) and regulated exchanges, with direct reporting lines to boards or equivalent governing bodies.
• Enhanced regulatory expectations that align with established financial market standards.
• A Government Accountability Office (GAO) study to evaluate existing control environments and identify gaps across various platforms.

The IIA stressed that internal audit plays a pivotal role by providing independent, objective assurance on governance, risk management, and internal controls, ensuring that risks and control failures are escalated without management interference. These recommendations are grounded in the IIA's globally recognized International Professional Practices Framework, widely adopted by regulated financial institutions.