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Home / SmartTech / Tech IPO stumbles over the question: Why are internal controls so bad at startup?

Tech IPO stumbles over the question: Why are internal controls so bad at startup?



The recent WeWork IPO debacle is only the latest in a series of IPOs where parent companies could not achieve the desired result. Simply put, investors and employees wanted a big exit. Instead, the company faces bankruptcy.

The company's failed IPO serves as a "canary in the coal mine" for other unicorn companies, with no viability in sight. Peloton, Uber, Lyft, Sunnova and SmileDirectClub, which have seen their share prices fall short of their debut, should be feared that profound downsizing and a rocky future could follow.

The Failure of WeWork and Other Technologies IPOs raise an important question: Why do private companies have such huge problems with their internal controls? In particular, adequate attention will not be given to data quality, audits, compliance with regulatory requirements and financial practices.

WeWork internal control issues

WeWork has experienced issues related to the company's internal control since the company first submitted its S-1

documentation. These documents showed that the company had given the CEO Adam Neumann a questionable degree of control over the business, while WeWork also quickly used up its cash reserves despite steadily rising revenues.

Neumann's voting rights and business practices (including the provision that a significant transfer of power to his wife in the event of his death gave cause for great concern.

As a result, the company's valuation of an estimated $ 47 billion in January was down to just $ 10 billion after submission of the S-1, and the continued decline eventually led Neumann to step down and relinquish his majority shareholding, far too little and too late for the IPO, which has now been indefinitely withdrawn and postponed. 19659004] A Widespread Concern

WeWork is unlikely to be unique with its problems in implementing sound internal controls in the technology world, and many of the problems that tech startups face are due to how different private and public companies are from Sarbanes- Oxley Act., Section 404 of the Act requires public companies to submit internal control reports that confirm the ethical and responsible management of their finances.

Many private companies willingly abide by these guidelines, but the law does not require that private organizations provide these reports. And since the bottom line is internal control policies, many companies neglect this area to focus on profitability. This is especially true for smaller companies where studies have shown that they are disproportionately affected by valuation costs. For example, for all six of my founding or co-founding companies, for time and cost reasons, we did not even consider publishing internal control reports.

But you can bet that I now strongly oppose them for startups I advise. Startups should set up the first building blocks for the control infrastructure right from the start-even if they're just triggering spending reviews on items over $ 1,000 or automating an email that reminds the team to change their passwords on a monthly basis. Most of the time, these mild "costs" pay off later.

The startup culture can also play a role in the development of bad internal controls. Working with a small team and in an ever-changing environment can make it difficult to introduce basic internal control procedures, such as: For example, the separation of financial responsibilities such as accounting and auditing, standardized financial documentation or additional authorization to carry out certain transactions.

In my first, third and fourth companies, we combined accounting and auditing at an early stage to save costs. And every time I started before the Serie A, which I inquired about, the leadership required additional permission for spending restrictions. This carefree approach ended with my recent startup, where we developed "Checks and Balances" systems right from the start: internal documents are kept in clear custody, we conduct monthly audits of financial and intellectual property, and we run daily bank settlements against expenses and carry out our reimbursement processes by requiring original receipts.

"Speed ​​is king" is a mantra that you can live with in the short term, but that can have catastrophic consequences in the long run. Focusing on profits can lead to internal controls fading into the background. Lack of organization can also cause tech startups to lose track of their cash flow. According to estimates by SmallBizTrends, 82% of all business failures play a role.

Worse, Poor Internal Control Can Increase the Risk of Fraud

As Nathan Edwards writes for The Innovation Enterprise, the dangers of insufficient internal control "are enough to encourage unethical behavior and the resulting fines to fundamental accounting errors resulting from overly complex tables can lead to excessive profits or losses and overpayment of taxes. Missing transaction controls can lead to inadequate collection of revenue, stockpile and cash theft, and overstocking. "To Edwards' Argument: At least one senior officer was jailed and two others were sanctioned by a startup court. We were involved – and the core of disruptive behavior was not checked by even modest internal controls, but could easily have been stopped.

What You Can Do

The example of WeWork and other recent failed IPOs should serve as an example cautionary note – regardless of whether your startup is considering an IPO or not. Without adequate internal controls, your business endangers your long-term prosperity.

Management should use both detective and preventative measures to protect a company's finances. I can say from my own experience that an independent auditor, regardless of the company's financial controller, is a must. Executives should follow a practical approach to understanding quarterly financial audits from day one.

Even basic steps, such as backing up computer data or entering a password to complete a transaction, can reduce fraud and errors. The implementation of a written code of conduct promotes ethical behavior and determines the consequences for fraud. Detective controls, such as internal audit, help detect errors and ensure that procedures are in place to resolve problems in a timely manner.

If you're a private company, regardless of your size, take a look at what internal controls do you have right now? In my current company, we have examined the paper path in terms of spending, reimbursements, revenue and intellectual property to find and close our own "gaps" – just as you would use "SWOT analysis" to fill gaps in one's abilities To find leadership teams. Detecting defects is crucial not only to future plans for the IPO, but also to maintaining the black numbers and creating credibility. The unfortunate truth is that there are no adequate procedures in many private companies. If decision makers in these organizations do not improve their processes, they expect more technical IPO errors in the future.

Jordan French is the founder and executive editor of Grit Daily News – his sixth startup.

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