Without question, the IPO market has essentially come to an abrupt halt. As most investors, executives and employees alike have hunkered down at home under expanded work from home mandates, and stock markets worldwide have experienced significant volatility, it is hard to predict with any level of certainty when the uncertainty of it all will abate.
At the start of the year, the executives of pre-IPO companies, as well as investors in pre-IPO companies, considered themselves well-positioned to take advantage of a long-standing bull market that was grounded in low unemployment, optimistic capital markets, low interest rates, and an accommodating economic backdrop. Things have changed monumentally since then. Although IPOs are still possible, most are delayed for the foreseeable future. So, how can a pre-IPO company better position itself during the current IPO slowdown?
One area to which pre-IPO companies and their management teams may wish to redirect their attention are finance transformation initiatives that can contribute to optimized internal and external reporting and enhanced communication with stakeholders when these companies elect to pursue or complete their IPO. With the new norm that COVID-19 has imposed upon companies—including, current requirements to operate and perform a significant number of back-office functions with a largely remote workforce—focusing on the enablement of positive change in the face of disruption becomes even more critical. This change can come in a variety of forms and may include a new ERP or EPM system implementation, improvement to existing forecasting capabilities, or optimization efforts around other systems and processes to enhance a company’s already existing infrastructure. Making this type of investment now can help enhance a company’s preparedness for future unseen events, as well as catapult an organization once the COVID-19 dust eventually settles and commerce comes roaring back. Refining current processes—including evaluating and exploring the use of automation, artificial intelligence, and robotic solutions in lieu of existing manual processes—can likely deliver (1) significant time savings and efficiency gains, (2) increased utilization of personnel on value-added tasks (e.g., financial analysis), and (3) expanded internal and external reporting capabilities. By proactively making investments in process improvement, technology enhancements, and financial and operational transformation initiatives, companies will undoubtedly best position themselves for sustainable growth and enhanced communication with both internal and external stakeholders as IPOs reemerge post COVID-19.
Processes & Controls
Complimenting the focus on finance transformation activities is addressing and leveraging Sarbanes Oxley (“SOX”) readiness and compliance. Under Section 404(a) of the Sarbanes Oxley Act of 2002, public companies are required to conduct an annual evaluation of, and publicly report on, the operating effectiveness of their internal controls over financial reporting. For newly-public companies, this requirement takes effect as of their second annual report on Form 10-K. Furthermore, companies that expect to lose their emerging growth company status within a reasonably short period of time subsequent to their IPO, will become subject to auditor attestation regarding the effectiveness of their internal controls over financial reporting. Lastly, Section 302 of the Sarbanes Oxley Act, which is applicable as of the first periodic filing subsequent to a company’ IPO, focuses on disclosure controls and protocols for which signing officers of the Company, typically the CEO and CFO, personally attest to the accuracy and reliability of financial information included within the Company’s required quarterly and annual filings.
Preparation for SOX compliance requires an understanding of current state business processes, financial reporting risks and an optimally designed suite of internal controls to mitigate these risks. Documenting business processes is not only a starting point for SOX readiness, but also can help a company quickly identify opportunities to automate and drive process efficiencies. Identifying both financial reporting and operational risks focuses a company on the right internal control activities to not only put in place effective internal controls over financial reporting, but also drive process efficiencies and data outputs that support strategic initiatives. SOX readiness efforts generally span 4 to 12 months to document existing controls, identify control gaps and/or deficiencies, remediate control gaps or deficiencies, and execute internal control testing to enable management to assert to effective internal controls over financial reporting. Factors that will likely contribute to the level of effort and time required to establish an effective control environment include the size and complexity of an organization, the maturity of the current internal control environment, and in-house SOX compliance expertise. Furthermore, the impacts of COVID-19 – including, requirements for accounting and finance professionals to perform their duties remotely – has shed new light on financial reporting risks and the design of internal controls.
Companies preparing for an IPO may benefit from accelerating their SOX compliance activities until the IPO market rebounds. Many of the internal control and reporting processes of SOX can be time intensive and require months to implement. Getting ahead of that now may be an appropriate course of action.
While the impacts of COVID-19 may have temporarily derailed the planned timing of your IPO, we believe that this delay may present new opportunities to reassess and optimize your ability to operate as a public company. We recommend that you utilize this time to continue to advance and optimize your existing processes, technology, forecasting and reporting capabilities, and control environment. We also recommend that you evaluate whether COVID-19 has shed new light on financial reporting and operational risks that may not have been apparent prior to the pandemic and, if so, you utilize the additional time to take actions that allow you to come out of the pandemic a stronger company.
MorganFranklin Can Help
Do you need help thinking through your IPO readiness efforts, SOX compliance, or how to engage in financial or operational change as a result of the increased disruption resulting from the spread of COVID-19? MorganFranklin Consulting is here to support you. Our IPO, SOX, and Transformation experts are available to assist with any challenges that you may encounter during these unprecedented times. Contact us today!