How to Prepare for a Pre IPO Audit: 5 Steps To Compliance

IPO will incur higher costs if you underestimating the risks associated with preparing the correct documentation.

Despite a slight decline in the number of IPOs in the first half of 2024 globally, there is a growing investor enthusiasm for new listings . Companies are hoping to see the current market conditions as an potential IPO window – a recent Reddit listing as one of the examples.

However, the investors are increasingly scrutinizing financial metrics and sustainable growth plans. And here is where an independent pre IPO audit comes into the spotlight. If your business approaches the IPO milestone, the complexities can feel overwhelming. While the allure of going public often centers on attracting investors and seeking high valuations, the technical groundwork is where the real challenges lie. 

A meticulous preparation can be the difference between a seamless IPO and one hindered with delays and unexpected challenges. Here's my perspective on how to approach this critical phase. 

What is a pre-IPO audit

IPO audit is an in-depth review of your organization and its processes, books and records, and overall compliance to operate as a public company.

This audit aims to provide a holistic view on whether your business is ready to go public and help identify the gaps in IPO readiness to mitigate any potential risks.

According to PwC, IPO planning, including an in-depth audit, should start 18-24 months before the actual IPO. The pre-IPO assessment needs to take a holistic view on the company. Starting from accounting basics and expanding into preparation to deliver due diligence to potential investors. 

A company preparing a SEC (U.S. Securities and Exchange Commission) registration statement. That’s a key document required for the listing IPO – needs to comply with an audit performed to the Public Company Accounting Oversight Board (PCAOB) standards.

The-IPO Check list

The audit broadly covers five key areas:

• Corporate governance, organization structure and cap tables.
• Accounting and financials, including sufficient funding to go public and operate post-IPO.
• Business model, including profitability, forecasting and growth strategy.
• Internal controls, including data protection, to meet listing standards.
• Regulatory compliance with requirements for public companies, including contracts, IP, licensing rights and other legal matters.

Ideally, your pre IPO audit should clear the way for a seamless IPO. But in case of any obstacles discovered, it will also enforce changes to any planned IPO timelines.  Nearly 40% of companies that completed an IPO said they wished that they had used a more formal IPO assessment process and framework. So getting the external auditors involved early is crucial. They will review all company documentation, perform onsite checks if necessary, and help address any readiness issues.

For private companies, auditing finances regularly is not obligatory, but highly recommended. However, public companies must submit quarterly and annual financial statements to the SEC.

Step 1. Focus on Financial Accuracy

One of the most important aspects of preparing for an IPO audit is ensuring your financial statements are rock solid – error-free and compliant with Generally Accepted Accounting Principles (GAAP). And you have an adequate technology infrastructure to consistently produce accurate financial reporting post-IPO. Any discrepancies here can lead to serious issues, including delays in your IPO or even a loss of investor trust.

It's not only a large and stable revenue that is the most attractive to public markets – but also a path to profitability. Having bottom line metrics in your financial reporting is a strong practice to adopt ahead of the IPO. 

Consolidating all financial data into a single, easily accessible system is key. At Approveit, we've found that exporting quarterly financial data into a simple Excel file can be incredibly effective. This practice not only simplifies the audit process but also showcases your commitment to transparency and thorough documentation.

Step 2. Implement Robust Access Controls

As your company prepares to go public, setting up stringent access controls becomes non-negotiable. Compliance with these controls is critical. Particularly in managing who has access to sensitive data and ensuring it is promptly revoked when employees leave. 

Transparency and detailed audit logs are paramount for IPO. When the auditors arrive, they'll want to see exactly who has access to what, and how you manage these permissions.

For example, if your company is rapidly expanding and hiring new employees, it's vital to ensure that the right access levels based on each person's role. Automation can be a lifesaver here. Manually managing access across a large and growing dataset is not only time-consuming but also prone to error before IPO. This is where identity and access management (IAM) systems can make a significant difference, automating these processes and ensuring compliance.

Step 3. Centralize Documentation and Compliance

One of the most common mistakes companies make before IPO is using multiple solutions to manage documentation and compliance. This approach often leads to confusion, delays, and a higher risk of errors. Instead, I advocate for centralizing all information into a unified audit log to share with auditors. That's valid not only for financials, but for other reporting such as the environmental, social and governance (ESG) statements.

We've found that it's incredibly advantageous to have end users submit requests and receive approvals within the same platform, eliminating the need for additional tools. Moreover, keeping the entire audit log in one place ensures that all data is easily accessible and verifiable by pre IPO auditors. Including approval history and access issuance records.

Step 4. Avoid ERP System Pitfalls

ERP (Enterprise Resource Planning) systems are powerful tools for managing a company's resources and processes. But they come with significant risks, particularly when preparing for an IPO. The implementation of an ERP system often takes longer than anticipated. This can be a major setback when you're on a tight IPO timeline.

I've seen companies underestimate the time and resources required for ERP implementation far too often. The development of a complex ERP system can take six months to a year or more. Which is why I recommend considering ready-made, cloud-based solutions that can be integrated more quickly and with fewer risks.

Step 5. Conduct Regular Internal Audits

Another critical step is conducting regular internal audits. These audits serve as a dress rehearsal, allowing you to identify and address potential issues before external auditors step in. Some companies opt to perform internal audits every three months.

Under the Sarbanes-Oxley Act (SOX), publicly traded companies are required to maintain accurate and reliable financial statements. With strict penalties for non-compliance. Regular internal audits help ensure you comply with all SOX requirements , giving both your company and potential investors confidence in your financial integrity.

Rigorous auditing and ensuring compliance with the regulatory requirements is a dealbreaker in the Shein IPO. As a company originating in China, Shein needs to show transparency and integrity when it goes public.

The bottom line: preparation is key

Preparing for a pre-IPO audit is not just a technical requirement. It's a strategic imperative that can make or break your IPO. Stop underestimating the risks associated with documentation and prepare for the audit in advance. The earlier you start, the smoother the journey will be. Establish the access system and transparency processes correctly from the outset and inform necessary internal transformations required for a successful listing. It will help you to facilitate your IPO preparation