Going public in today’s environment is much different than it was five to 10 years ago. Rapid regulatory change – including provisions around Sarbanes-Oxley – put additional and significant pressures on an organization’s infrastructure, and the market windows for an initial public offering (IPO) tend to open and close much faster. Companies that plan early and invest the time to understand the requirements, pitfalls and best practices are much more likely to have a successful IPO.
Many companies – especially those that are young and have experienced rapid growth – tend to run into the same challenges when preparing for an IPO. Their focus is typically on product development, sales and marketing activities, and as a result many personnel, back-office and infrastructure issues are frequently ignored or lack priority. However, when preparing to go public, many of these areas that lack maturity become paramount, and organizations suddenly find they don’t have the right resources – or systems – in place internally to drive transformation successfully within the desired timeframe.
As an example, a young pre-IPO company being developed from the ground up focused exclusively on the registration process and its roadshow. Timing for the IPO was not defined, and a readiness assessment had not been performed. The company had under-invested in the design and development of key processes and controls, including revenue, accounts receivable, fixed assets, inventory and tax, and management failed to develop formal processes or documentation in preparation for achieving SOX compliance. As a result, the company encountered unnecessary delays and frustration by not having performed its pre-IPO homework.
Challenges and Opportunities
The IPO journey is complex and can lead to a number of potential oversights and mistakes along the way. Some of the most common pitfalls include:
- Failure to assemble the right team to help take the organization public. The team should possess previous IPO experience, and members should have the knowledge and bandwidth to participate fully in the readiness effort. Management should remember that employees have their regular ongoing responsibilities; a successful path to public company readiness requires striking the right balance between IPO preparation and the performance of day-to-day business operations.
- Underestimating the level of effort required. The public company transformation journey involves a complex array of tasks, deadlines and focal points that require significant time, effort and attention throughout the organization. Many of these tasks will have dependencies that require prioritization and scheduling of resources.
- Failure to fully develop sound business processes and infrastructure, particularly those that support financial reporting processes. Many private companies lack a discipline built around their reporting processes; therefore, financial statements may not be able to withstand the scrutiny of the SEC. Organizations often scramble to pull together documentation that supports prior annual audited financial statements without focusing on the big-picture fundamentals of effective finance and accounting functions and the financial reporting processes that must be in place well before going public.
- Failure to assess the organization’s IT readiness. An organization’s ability to conduct accurate, timely and effective financial reporting and regulatory compliance hinges on the strength of applications and systems infrastructure. Many companies do not fully anticipate the IT infrastructure support necessary to meet the demanding reporting and compliance requirements that affect public companies. In addition, scalability is often overlooked, which will become an organizational pain point as the business expands.
Our Point of View
An IPO is a strategic and significant event in a company’s lifecycle. To ensure public company readiness, organizations should adopt a four-phased planning approach.
- Conduct an initial readiness assessment against current benchmarks as it relates to key systems, processes, controls and personnel within the organization.
- Identify the readiness of core capability requirements for reliable financial reporting and efficient financial close, corporate governance, regulatory compliance, and IT scalability.
- Assess the urgency, level of effort and solutions needed to close identified gaps based on analysis of cost and benefits, and sequence these events based on priority.
- Develop executable work plans, a timeline and resource requirements to implement appropriate solutions; ensure these processes are sustainable and scalable.
How We Help Companies Succeed
Our Public Company Transformation practice helps companies assess their level of preparedness for an IPO. For each client, we help create and execute a plan to optimize the capabilities of its organization, including its internal processes, human resources and information systems, for both a successful initial offering and subsequent operation as a public company.
With years of experience providing IPO readiness assistance, Protiviti has developed an approach that effectively identifies key areas of focus. We provide specialized services to fit your needs, whether they include registration statement financial reporting assistance, project management, process/control remediation or systems enhancements. Our objective is to help IPO candidates avoid surprises and save time and money, as well as increase the likelihood their IPO will be timely and successful.
One of the world’s more popular social media utilities selected Protiviti to help prepare for its IPO. Our team focused on three key areas to help management transform this organization:
- First, we performed a pre-audit and public company readiness assessment, developed an action plan to prepare for the audit, assessed readiness to be a public company, and developed a remediation plan.
- Next, our experts performed a revenue reporting and process assessment, which included remediating process and reporting issues. We helped management develop documentation supporting revenue accounting requirements, documented methods to account for historical revenue and assessed controls for an Oracle ERP implementation.
- Lastly, we performed a financial policy gap assessment that included design and testing of both application and manual controls, design of data conversion validation controls, documentation of the system development lifecycle risk and control matrix, and documentation of IT general controls risk and matrices.
Our work contributed to a successful IPO by helping this young, fast-growing company prepare appropriately for entering the public company arena.