Getting Into In-Season Shape: Is Your Close Ready for IPO?

Here’s an art and accounting parallel that might fall on its face, but it’s worth the attempt:

If you’re a private company, your close probably looks like a Van Gogh: the stakeholders can grasp the big picture, even if there’s some precision left to be desired.

But taking your company public? That demands the accuracy of da Vinci — like his famous anatomical drawings, a public company's financials must be methodically documented, traceable, and verified – a masterwork of accounting precision.

As we’ve noted before, defining appropriate close benchmarks for small teams can be nuanced, especially since they often operate with more flexible close timelines and processes. That said, the transition to being a publicly-traded company requires a transformation in both precision and speed. Here, we’ll discuss the characteristics that define an IPO-ready month-end close.

What Differentiates Public and Private Closes?

Prior to any particulars, it’s helpful to keep this idea in mind: your current month-end close today is as simple as it will ever be. Going public brings inevitable changes—potential acquisitions, expanded revenue streams, product lines, and increased complexity. In a short span of time, your close checklist tasks might double. For these reasons, getting your close into shape sooner than later is essential. 

Elements of a Public Close

The Connor Group defines a public company close in terms of these components:

• All “sub-ledger or sub-system” entries are posted, closed, and reconciled.
• All journals and month-end entries are posted.
• All key balance sheet and key P&L accounts are analyzed and reconciled.
• Financial variance analysis is completed.
• Management reviews are performed (in accordance with SOX 302)
• Financial reporting package is completed (in accordance with SOX 404)
• All of the above is completed within 10 days or less, with zero audit or post close adjustments.

These elements may appear as enhanced versions of a standard close, but which factors—here or unlisted—might present a greater challenge than expected?

Full Balance Sheet Reconciliation

Private companies often defer reconciling low-risk balance sheet accounts until quarterly or annual closes. Public reporting, however, demands reconciliation of all accounts, along with a documented rationale for any accounts left unreconciled. Teams unaccustomed to reconciling beyond key accounts should consider the increased time and labor a full reconciliation entails.

Completion in 10 Days

Seeing the 10-day benchmark, you might think, “10 days? That’s easy, we already close in six.” 

Like going from intermediate to expert mode in a video game, can you keep your six day pace when the difficulty is turned up a notch? Do your processes and people stand up to the demands of public accounting? Can you balance a tight close with the heap of new responsibilities from the IPO process?

SOX Compliance

SOX-related tasks are in order for any company on the path toward IPO. Unlike the two concerns above, most private accounting orgs have minimal SOX experience. Ramping up a SOX operation from zero to one can take roughly a year, and accountants deem it one of the more grueling parts of the IPO process. Thus, when evaluating the strength of their month-end close, teams will want to factor in the additional SOX work as a measure of team bandwidth.

So, is my close IPO-ready or not?

This checklist, while not exhaustive, provides some structure to the question of IPO readiness by evaluating close procedures through four lenses: people, processes, systems, and controls.

1. People
   1. Do we have the right personnel to perform current close tasks and those that will come when our business scales?
   2. Do we have structured communication with cross-functional partners, especially the FP&A team, surrounding the close process?
   3. Are our employees educated well-enough on GAAP + SOX requirements or at least have training opportunities scheduled?
2. Processes
   1. Have we identified opportunities to move certain close tasks or workflows into the pre-close period?
   2. Can our team complete full balance sheet reconciliations with moderate ease?
   3. Have we set-up processes to account for stock-based compensation and other nuances related to equity?
3. Systems
   1. Have we implemented some form of AI or automation that expedites workflows in our close process?
   2. Are we confident that we’ve built a tech stack that can support both current and future closes?
   3. Do we have a strong relationship with our IT team and mutual understanding of where support will be needed when publicly traded?
4. Controls
   1. Have we documented our existing controls in full and practice them as completely and routinely as possible?
   2. Is there a well-constructed roadmap for our SOX implementation process?
   3. Does our team understand the ICFR disclosure requirements that are part of the quarterly 10-Q form?

Beyond these evaluations, perhaps the ultimate question that teams should ask themselves in advance of going public: has our team been functioning like a public accounting team while still a private company? This question extends to all facets of the accounting operation, but it’s an equally good measure for the performance of a company’s month-end close process.