Preparing the Financial Accounting System for IPO

On the path to an IPO, many companies grow through acquisitions. They buy up competitors’ businesses and expand their geographic presence by absorbing small regional players. At the same time, in order to continue the ongoing business, the management of subsidiaries remains at the local level. Financial accounting processes built in an acquired business are difficult to change on the fly.

Challenge in moving financial accounting towards uniform standards

Building a unified sales system, introducing a corporate standard in the field of human resource management, standardising the customer service system within the acquired business are more or less understandable projects. The situation with bringing the financial accounting information system to a unified standard is much more complicated.

The combined company receives a landscape of patchworkly automated business areas. The situation is further complicated by the fact that the regions in which the acquired companies operate have their own tax legislation, requirements for accounting for personnel costs and calculating wages. The acquired business has local financial accounting standards that form a unique history of financial performance. Finally, each of the acquired businesses has historically been automated on its own ERP system.

Financial managers face the challenge of consolidating data from this patchwork of financial statements. Understanding the specifics of reporting in each acquired business, it is relatively easy to process the data for a one-time construction of consolidated reporting. But this does not eliminate the need to build a unified financial accounting process and implement a unified daily operations for regional branches.

What does preparing for an IPO require from accounting?

Companies wishing to go public must be prepared to provide three years of audited financial data. The unified accounting system should be able to provide this. Investors and underwriters will want to see a stable debt-to-equity ratio, ample market capitalisation, and predictable revenue and earnings streams.

IPO candidates must also be able to address contemporary accounting issues such as asset impairments, subsidiary consolidated financial reporting, and revenue recognition.

The business must establish processes for key areas that relate to revenue, headcount and all other major expenses, and the infrastructure must have the necessary controls to manage these processes, as well as the flexibility to adapt to changes in the future.

Finally, the company must be able to provide statistics on historical data and make financial forecasts for the future in a single frame of reference.

Difficulties in transition to a unified financial accounting system

So, it is impossible to do without introducing a unified ERP system into consolidated assets to enter an IPO. To do this, it is necessary to build a dynamic and carefully planned project within the business to transition all acquired businesses to a single system. Time for such a project, in the context of management’s overall IPO strategy, is usually very limited.

During the project to prepare for IPO, it is necessary not to lose the current dynamics of accounting in all companies of the group, to overcome the resistance of local personnel, to build a new IT architecture of the system and integrations, to think through the depth and detail of the migration of historical data from local systems, and to take into account the regional specifics of accounting.

Such work should take place in close cooperation with both the information system supplier and the key managers of the finance and HR blocks of all consolidated businesses.

Hire a strong advisor

An IPO requires a lot of mobilisation and competence. Research by EY shows that investors consider trust and management experience to be among the most important non-financial factors for IPO success. The demands of the IPO process will take the CFO away from day-to-day operations for up to six months, meaning a strong project manager is needed to take the reins of the consolidation.

With many years of experience in business transformation and implementation of complex automated systems, LOYP will help you cope with the task of preparing the financial system for an IPO within the time frame you require.