In today’s fast-moving market, companies may have a narrow window to complete an initial public offering (IPO) due to macroeconomic shifts, geopolitical events, or investor sentiment. To meet high investor expectations, IPO readiness is important for companies considering going public, especially private equity firms and their portfolio companies. Being IPO-ready means having robust financial controls, clear growth narratives, and a compelling equity story. This article will explore how effective internal controls are critical for IPO success, investor confidence, and sustainable growth.
What Are Internal Controls & Why Do They Matter in the IPO Process?
Internal controls are policies, processes, and systems designed to help ensure reliable financial reporting, effective and efficient operations, and compliance with laws and regulations. The controls help organizations identify, assess, and manage risks, especially as they prepare for the increased scrutiny of public markets during an IPO. Internal controls assist with:
- Safeguarding Assets: Controls help protect company assets from loss, theft, or misuse by establishing clear processes and responsibilities.
- Accurate Financial Reporting: Controls help produce timely, accurate, and reliable financial statements. This includes having robust systems for closing the books, preparing disclosures, and supporting audit requirements.
- Supporting Compliance: Controls help organizations comply with applicable laws, regulations, and standards (such as the Sarbanes-Oxley Act and SEC requirements). This is especially important for companies transitioning to public company status, where expectations for documentation and controls are higher.
For organizations preparing for an IPO, the COSO internal control framework is the standard for designing, implementing, and evaluating internal controls over financial reporting. The framework provides a structured approach to internal control, covering areas such as control environment, risk assessment, control activities, information and communication, and monitoring. Following the COSO framework can help an organization assess gaps, strengthen controls, and ensure readiness for public company requirements.
Building a Governance Framework for IPO Readiness
Strong governance frameworks are essential for IPO readiness. They help ensure that companies have the right people, systems, and processes in place by establishing clear roles and responsibilities, implementing scalable enterprise resource planning (ERP) and reporting systems, and maintaining reliable, repeatable processes for closing the books and preparing disclosures. Audit and accounting controls also help companies meet expectations for transparency and reliability with enhanced documentation, audit trails, and compliance with standards such as SOX and PCAOB requirements.
Internal control over financial reporting (ICFR) is critical for producing timely, accurate, and reliable financial statements, which are required for SEC filings and investor communications. For companies going public, management must file a Sarbanes-Oxley 404(a) assessment of internal controls by their second annual report. Even if an emerging growth company receives a five-year delay for an auditor’s opinion on ICFR, management’s own assessment is still required early in the public company life cycle. Strong governance frameworks and effective internal controls signal to investors that an organization is well managed and prepared for the scrutiny of public markets.
Internal Control Examples for IPO Preparation
Accounting Internal Controls & Audit Controls
Organizations preparing for regulatory compliance and reporting may benefit from these examples of internal controls:
- E-Signature Implementation: Companies are encouraged to upgrade their systems to include features like e-signature capabilities, which support audit trails and secure authorization of financial documents. This is part of building a scalable ERP and reporting environment that meets public company standards.
- Digital Cost Reporting: Robust ERP systems and reporting tools can handle multientity consolidation, segment reporting, and provide reliable, investor-grade financials. Organizations should move from manual spreadsheets to automated digital platforms.
- Compliance Checklists: Checklists help ensure regulatory requirements are met, documentation is complete, and processes are repeatable and reliable.
Companies should start IPO readiness planning early, ideally two years in advance. Organizations should conduct gap assessments of people, systems, and processes to help identify and address weaknesses in internal controls. Entities must transition from manual workarounds to integrated systems that support fast, accurate closes and provide audit trails. Public company audits require more robust documentation, including position papers, audit trails, and support for key reports.
Internal Controls in Accounting for Private Equity Portfolio Companies
Private equity-backed companies face some unique challenges in preparing for an IPO. The window for an IPO can close quickly, and companies must be ready to act decisively. PE-backed companies often face challenges in scaling their teams, upgrading systems, and aligning processes to meet public company standards. Transitioning from private and public company status also brings stricter audit standards, independence requirements, and enhanced disclosure expectations.
Private equity groups and their portfolio companies should invest early in IPO readiness, including engaging advisors for gap assessments and implementing recommendations well before the IPO. Companies should make sure that they have the right talent in place, supplementing internal resources with technical professionals as needed. They should work closely with advisors, auditors, and legal counsel to clear conflicts, address independence requirements, and prepare for audit and the SEC comment letter process.
Talent Readiness: The Human Side of IPO Success
IPO readiness is not just a finance and accounting exercise. Companies must make sure their teams are properly trained and have the bandwidth and alignment needed for public company requirements. Management must be able to produce robust position papers, support for key reports, and thorough documentation of accounting policies, transactions, and significant estimates. Teams must work together to gather data, align on strategy, and make sure all aspects of the business are prepared for public company scrutiny.
Companies may need to upskill their finance, compliance, and operational teams to meet the demands of an IPO. This includes hiring and training staff with know-how in technical accounting, SEC reporting, and public company processes. Organizations should build teams capable of handling complex transactions, such as revenue recognition, segment reporting, and stock-based compensation. Leadership engagement is critical, as seen with CEO certification requirements. Ongoing education should be encouraged, with leadership and teams staying informed on evolving regulatory requirements, audit standards, and best practices for public companies.
IPO Readiness Checklist: Steps to Implement Effective Internal Controls
Organizations preparing for an IPO should consider taking these actions:
- Governance Framework Review – Plan early, build a narrative, and assign roles.
- ICFR and Audit Controls Assessment – Conduct a gap assessment, prepare for SOX, enhance documentation, and address material weaknesses.
- Digital Transformation – Upgrade systems, automate processes, and enable audit trails.
- Talent Readiness and Training – Build the right team, upskill staff, foster collaboration across departments, and bring in specialists as needed.
- Compliance With Regulatory Changes – Monitor updates, use compliance checklists, and prepare for SEC comments.
- Pre-IPO Planning and Documentation – Conduct readiness assessments, plan for milestones, and engage advisors early.
Investor Confidence & IPO Success: The Impact of Strong Internal Controls
Robust internal controls—such as scalable ERP systems, audit trails, compliance checklists, and clear roles and responsibilities—help companies demonstrate strong governance, accountability, and transparency. Companies that invest early in building and testing their internal controls are better positioned to meet regulatory requirements, respond to SEC comments, and avoid costly delays or material weaknesses.
Internal controls in accounting and audit controls both support the production of timely, accurate, and reliable financial statements to help gain investor trust. Internal controls in accounting help ensure that financial data is accurately captured, securely authorized, and properly documented. Audit controls such as enhanced documentation, audit trails, and compliance with standards such as SOX are necessary for public company audits.
Preparing for an IPO: Lessons Learned & Best Practices
Among the best practices for organizations preparing for IPOs is to begin preparations as early as possible to help avoid costly surprises and respond effectively to market opportunities and regulatory requirements. Early planning includes conducting gap assessments of people, systems, and processes; engaging professionals such as auditors, legal counsel, and consultants; and building a compelling equity narrative that aligns with financials and long-term strategy.
Organizations should make strategic investments in people, technology, and processes to support IPO readiness. Companies should allocate resources toward upgrading ERP and reporting systems, building cross-functional teams, and supplementing internal talent with technical experts. In addition, organizations should stay current with evolving regulatory requirements such as Sarbanes-Oxley, PCAOB, and SEC standards. Ongoing education, leadership engagement, and a culture of learning are essential for adapting to changes and maintaining compliance as a public company.
How Forvis Mazars Can Help With IPO Readiness
Investors and the public markets expect companies to have strong governance and internal control frameworks. Material weaknesses or lack of preparation can erode investor confidence, impact stock prices, and even cause companies to miss the IPO window. Yet internal controls are not just for the IPO event. They are foundational for company operations, supporting ongoing compliance, reliable reporting, and the ability to scale and adapt as the business grows.
Forvis Mazars can help. Our professionals have extensive experience with helping private equity firms and their portfolio companies prepare for IPOs and public life. We can help companies design, implement, and test internal controls, including SOX readiness and PCAOB audit requirements. If you have any questions or need assistance, please reach out to one of our professionals.