Top 5 Sarbanes-Oxley (SOX) Readiness Tips for Emerging Growth Companies

As the saying goes “an ounce of prevention is worth a pound of cure”, the same holds true for growth organizations and how you can prepare to address Sarbanes-Oxley (SOX) requirements during an intense stage of growth and activity.

At TSI, we’ve seen this movie quite a few times as we consistently work with fast-growing companies. It starts with a great launch and a strategy that, after a few bumps, seems to be falling into place. Then, Finance and other departments run at “redline speed” in the pursuit of company growth. And after years of hard work, you are finally poised for the big IPO or possibly a lucrative acquisition.

Click here for more info on TSI’s SOX compliance expertise.

But before you cash in, the team has some heavy lifting to do. For Finance and company leadership to maximize the opportunity at hand, there are important tasks to complete related to:

• Controls – Adequately document and test internal controls over financial reporting (ICFR) to be ready for an eventual audit by the external auditors. The Sarbanes-Oxley Act of 2002 is responsible for the ICFR regulations, and failure to comply can cause big headaches.
• Technology – Whether you are using your “starter” system (often QuickBooks) or have moved up, this will make a difference in the areas of efficiency, information security and management nimbleness.
• Processes – Tied to controls, how clearly documented, efficient and effective are your business processes? Are there other regulatory requirements that are factored in so ISO, FDA or other professionals can certify your processes?
• Organizational factors – Are your roles and responsibilities well defined (and from a controls standpoint, is there proper separation of duties)?

Here are 5 SOX readiness tips that will help pave the way for a smoother transition into the realm of public company ownership and investor bliss:

1. Key controls are king- providing a reasonable level of assurance that material errors will be prevented or detected in a timely manner. There is a tendency, especially in first time SOX implementations, to go overboard and design too many controls.

Be careful here since all key controls must be tested and determined to be operating effectively. The more controls, the higher the cost and effort associated with your SOX program. Supplement your internal team with experienced outside resources to assure you are taking an effective but practical approach to SOX.

2. Document and communicate financial, operating and legal policies and procedures from the beginning. Keep your team updated and aware of major changes- it will contribute to the right cultural mindset around the importance of internal controls and help you avoid a potential material control weakness on your first external audit.
3. Proactively plan and communicate with your external auditors. Agree up front on the approach you will use to assess risk and document controls. There is more one than one way to skin this cat, avoid big surprises by staying aligned with your auditors.
4. Pay attention to the segregation of duties, especially in smaller organizations, and design compensating and management review controls where needed. For example, do not allow the person that maintains the general accounting ledger to also have authorization to approve purchase orders. Create management review reports and set up recurring performance review sessions to spot and understand ratios or metrics that don’t make sense and may require more investigation. ERP systems today provide powerful analysis and reporting tools that can strengthen and improve your overall control environment. Click here to learn more about TSI’s consultancy expertise in ERP software evaluation, selection, and implementation.
5. Using financial tools like QuickBooks, NetSuite, or Intaact makes all the sense in the world for a start-up. They are relatively inexpensive and easy to begin using on-line. As you grow and your information needs become more complex, the costs to change increase and the payback period gets longer.

Have a plan for converting to a more robust financial platform from the beginning. Milestones such as an acquisition and/or the need for multiple companies, extremely high revenue growth, adding more people to your staff, the need to have complex revenue recognition, consolidation, inventory, billing options and other needs can easily trigger a move to evaluate more sophisticated systems.

Staying ahead of your system needs will help you avoid being in the midst of a technology conversion project during an IPO or an acquisition.

In summary, there is as much art as there is science to getting ready, establishing and maintaining effective control environments. Each organization and situation is different. TSI specializes in assisting high-growth middle-market clients with planning and execution for SOX and many other areas of finance. Contact TSI to learn more.