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4.3.3 Internal Controls

After finance effectiveness, the next most important thing that organizations need to evaluate
for IPO readiness is the internal controls. This is needed to ensure preparation for Sarbanes-
Oxley compliance.

Delaying the Sarbanes-Oxley compliance till the preparation and marketing of the registration
statement could lead to a difficult IPO process.

Many businesses have noticed that major process improvements are required to effectively
enforce a good internal control system, so delaying Sarbanes-Oxley compliance may cause a
massive strain on staff who should be concentrating on compiling the filing statements and
collaborating with underwriters and banks.

The Sarbanes-Oxley Act includes eleven key components that outline roles for the auditors,
boards, and management of public corporations in the domains of corporate governance,
accounting standards, and financial transactions.

The most expensive clause of Section 404 of the Sarbanes-Oxley Act allows the leadership of
a registrant (CFO and CEO) and the independent auditors to inform on the soundness of the
business’s internal control over financial statements.

This section requires the integration of an internal control document in the annual financial
statements, validating the duty of the leadership to develop and sustain an effective internal
control system and financial reporting practices. This involves an evaluation of the quality of
the business’s internal control over financial reporting.

The control system used to perform the appropriate assessment must also be defined by
businesses. US businesses usually use the Treadway Commission's Committee of Sponsoring
Organizations (COSO) Internal Controls — Integrated Structure.

COSO illustrates five essential components for successful internal management: monitoring,
control environment, knowledge and communication, control activities, and risk assessment.

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