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5 SOX Compliance Tips for Early Stage Startups

Sarbanes-Oxley compliance has come an incredibly long way since the corporate governance law was passed nearly two decades ago. That doesn’t mean startups are in a hurry to become SOX compliant. Still, for a high-growth startup that may one day go public, its SOX-like compliance efforts can give assurance to management and investors that the company’s financial reporting can be relied upon.

What makes SOX compliance more clearly beneficial, compared to the early days of the anti-fraud law, is the significant financial operational efficiencies that open up when companies assess and tighten up their internal controls over financial reporting. With the help of financial integrity experts, they can realize such efficiencies as they start understanding and documenting their internal controls.

As your early stage startup contemplates the future, including potential exit strategies, what would you need to do to become SOX compliant?

SOX Compliance for Startups

Tip 1. Firm up your financial foundation. Your emerging growth company’s venture into the public markets might seem far away. Strategic opportunities can unexpectedly arise, however, in the form of a SPAC (special purpose acquisition company) merger, accelerating your company’s need to be IPO ready or SOX ready. Despite whatever strategic plan is in the works, the financial foundation of your startup should be sound so that you have the level of financial information and analysis needed to confidently move the company in the right direction.

Have investments in technology kept up with the size and complexity of the company and where it’s headed? Are your accounting processes practical and leading to timely, credible financial reports that are auditable? Do you have access to the kind of strategic financial expertise required to help you move the startup forward?

Tip 2. Keep current on your key risks. As your startup quickly moves ahead, your risk management efforts need to be adjusted. Risks change as the markets change, as new employees are brought in, as the economy shifts, and as customer demographics evolve. A large part of SOX compliance involves understanding the current major risks facing the company, so risk management for IPO-headed startups is also important.

Tip 3. Seek expertise early and often. Whether your company needs a version of “SOX lite” right now, an idea of whether it’s headed in a smart direction in its growth journey, or simply some expert advice, you need the right expertise to help you. Amid fast growth and your assessment of your high growth startup compliance, you’ll likely find that you need more insights than you can find in-house.

You’ll need to connect with experts who will adjust their guidance to where your startup is right now and then will be there with relevant solutions as those needs change. Seek out a finance and accounting consulting firm that understands emerging growth companies like yours as well as the version of the company you hope it will become.

Do the consulting firm’s experts have experience in your industry, with companies like yours? And if they don’t, how can they meet your needs? Look for a consulting firm that tailors its solutions to their clients rather than trying to bend a company toward its solutions.

Tip 4. Be prepared to act like a public company. Does your team have the skills and resources to meet the ongoing financial reporting demands and SOX requirements of a newly public company? The deadlines are not flexible once your company goes public, and the scrutiny is higher. Pre-IPO companies can ease into meeting the higher expectations by truly understanding what it takes to act like a public company, including SOX 404 compliance and all that entails.

Some of the main internal controls that a public company is expected to adopt are simply best practices that every company should be doing, such as segregation of duties. Undertaking good habits as early as possible can minimize the risk of a material misstatement of the financial statements.

Tip 5. Communicate with your external auditors. Here’s a tip that not everyone intuitively realizes is a possibility: You can proactively check in with your external auditors to understand their expectations.

SOX experts can help you keep these communication lines open, while retaining independence between your startup and the auditors. This way you can understand what auditors want to know and minimize any back and forth that would require your attention. After all, you have so many other responsibilities besides SOX compliance for startups.

How Does Sarbanes-Oxley Affect My Startup?

You may be wondering, “How do I implement SOX in my high-growth startup?” The short answer is startups do not have to be SOX compliant until they are public. Depending on your current growth plans, however, you could find that your startup should work toward becoming SOX ready. To set the wheels in motion, reach out to SOX and financial integrity experts who can help guide your company through what you can and should do now, based on your current growth plans.

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How To Build A Successful Emerging Growth Company

Getting a small business or startup past the two-year mark is just one of many promising milestones. So many young companies fail early, so passing certain goalposts can be gratifying to the owners and entrepreneurs of an “emerging growth company,” a fast-moving business that may be venture backed or will soon seek significant funding. How can you ensure a bright future as you build your business? Here are a few strategies that have worked for others who have successfully built a business.

The Basics of an Emerging Growth Company

There are various definitions of an emerging growth company. The most prominent comes from the U.S. Securities and Exchange Commission, which considers an emerging growth company to have less than $1 billion in total annual gross revenue in its most recent fiscal year. This qualification allows a pre-IPO company to follow reduced disclosure and reporting requirements for its registration statement with the SEC.

Another way to characterize an emerging growth company is by its stage in the business lifecycle. An emerging growth company not only shows promise, it is in the process of developing or solidifying a strong foundation on which to further build the business.

Still running on minimal resources, it’s received some validation from investors and customers, and it may or may not go public one day. The business is moving at a fast clip and probably wants to get on more solid footing. It’s around this time that leaders of the company realize they could use some help with understanding their business and how it’s performing. There are strategic decisions to be made, to take the company in the right direction, but any moves need to be based on timely, reliable financial data and what that data means.

The company may not yet be ready for a full-time CFO at this point, however. An outsourced accounting team with a part-time controller could be the right fit for getting the finances in order and gaining a better understanding of the business. Are the current plans realistic? What do we need to adjust in order to reach our main goals?

When companies are first starting out, really early on, there may not be much of a plan—more of a hope to explore if a tech innovation can turn into a marketable product. Or the start of a potentially life-saving drug that will need full funding and interest to get it through the development phases. Such companies start out by just getting by with minimal resources for completing payroll, recording transactions, and paying the bills. As the company builds up, however, the need for a different level of financial expertise quickly becomes clear. Establishing finance and accounting processes, getting on the right systems for the company’s size and complexity, and having CFO-level expertise when needed as the company prepares to seek funding are all steps toward  building a successful emerging growth business. These are steps for moving beyond the “building a startup” phase toward a brighter future.

The Essentials of Building a Successful an Emerging Growth Company

Is your emerging growth company prepared for the changes ahead? Do you wonder “How do I properly build my company?” or “What are the best ways to grow my business?” Start off by considering if you have some of the essentials:

  • A tailored plan for growth—that takes into account your talent, your goals, and where the company is at this moment
  • A tech stack of integrated applications (including software for accounting, payroll, expense management) to keep your financial operations running smoothly
  • Senior level financial expertise that can offer timely guidance as the company pursues growth plans or goes after funding
  • An honest, practical understanding of the business performance and forecasted future

Financial Reporting Requirements for Emerging Growth Companies

The expectations of an emerging growth company expands quickly once it pursues either debt or equity funding. It may need a higher level of financial help as it brings in more people and more talent to meet rising customer demand, ramp up sales and marketing efforts, or pursue an acquisition. While the company scales up, it also requires more structure and an understanding of whether and how it can keep up the pace with the resources it has and is planning to take soon. The company’s growth depends on making the right decisions.

Its financial reporting efforts need to be robust for the sake of decision-makers but also for its growing circle of stakeholders. Lenders will likely want to see audited financial statements, for instance, and the company would have to embark on a long and potentially complicated process to get that first audit complete. Many inquiries are likely to follow, so you’ll want a dedicated expert around who can support the company during the audit process, so everyone else can focus on their day jobs.

How Do You Build a Successful Business?

The million-dollar question any new entrepreneur wants to know: How do you build a successful business? Those who have done it know that it’s more than the product you sell or the idea you come up with. Your company could have the greatest, most unique idea for an app that every American will want to subscribe to over the next year. But, as your company considers adding this on to its portfolio, will it be able to keep up with demand? Does it have the capability of forecasting how long that demand will last? If your outlook is unrealistic, you could be setting up the company for a lot of disappointment—and disappointed users.

Make sure you have the information you need, exactly when you need it. When it’s time for your emerging growth company to further develop the finance function, bring in more finance and accounting expertise, and lean on growth consulting pros, you know where to reach us.

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