From Fire Drill To Framework: Six Keys To Strong Internal Controls

After several years of sluggish activity, the public markets are showing renewed momentum, from traditional initial public offerings (IPOs) to mergers with special purpose acquisition companies (SPAC) and direct listings. Yet many companies pursuing these public listings, or even existing public companies approaching certain size thresholds, find themselves unprepared for the rigorous internal control requirements that come with being a public registrant.

While management teams often concentrate on bankers, investor presentations and legal filings, one area can derail their debut faster than almost anything else: SOX readiness.

What SOX Means and Why It Matters

The Sarbanes-Oxley Act of 2002 (SOX) was enacted to restore investor confidence after corporate accounting scandals like Enron and WorldCom. Among other provisions, SOX requires public companies to design, implement, regularly test and report on internal controls over financial reporting, known as ICFR.

Two sections are particularly important:

1. Section 404(a) requires management to assess and report on the effectiveness of those internal controls.

2. Section 404(b) goes a step further, requiring an independent auditor’s attestation for larger, accelerated filers.

These requirements aren’t just bureaucratic boxes to check, they are mechanisms to ensure accuracy, accountability and trust in the capital markets. A company that neglects them risks audit failures, delayed IPOs, higher fees and reputational damage with investors and regulators.

Internal Control Failures

In practice, many companies treat internal controls as an afterthought, addressing them only in the final months before going public. This reactive approach almost always leads to costly “fire drills.”

Some frequent challenges include an overreliance on entry-level accounting software like QuickBooks, which often lacks the scale and controls needed for public company compliance. A lack of proper and robust segregation of duties, due to understaffed or lean accounting and finance departments, can also cause struggles. One such struggle may be disconnects between IT and finance teams, leading to gaps in systems access, data integrity and change management controls.

Another common challenge is unrealistic remediation timelines and a lack of understanding of how long it takes to design, implement and demonstrate effective controls. And, limited collaboration among management, auditors and advisors can cause misaligned expectations and late surprises.

With the Public Company Accounting Oversight Board (PCAOB) increased scrutiny of IT general controls in their recent inspections, audit firms have raised their standards as well, making early readiness more critical than ever.

Six Critical Success Factors For SOX And IPO Readiness

Even well-intentioned management teams can stumble if they underestimate the scope of SOX compliance. Based on our experience across numerous readiness engagements, six factors consistently separate successful transitions from last-minute scrambles.

Start Early

SOX compliance isn’t a switch you flip. One midsized technology company learned this the hard way after unexpectedly tripping the audit threshold late in the year. With only weeks to complete months of work, leadership partnered with our team to triage key processes, ultimately avoiding material weaknesses—but not without significant strain. 

Designing, implementing and testing internal controls takes time and iteration. To build a culture of compliance, companies should begin planning 18 to 24 months before an IPO or significant transaction. This allows sufficient time to document processes, identify control gaps, implement improvements and demonstrate consistent operation over multiple reporting periods.

Collaborate Across Stakeholders

Effective SOX readiness requires transparency and alignment across the organization—not just within the finance department. In one organization we worked with, initial confusion and competing priorities threatened progress until management, IT and auditors began meeting regularly to share updates and align on testing priorities. Once collaboration improved, the project moved from chaos to control, resulting in a clean attestation and stronger cross-functional trust.

Meet Frequently

Quarterly updates often aren’t enough. Sometimes, weekly or biweekly meetings are necessary to establish the rhythm required to identify and resolve issues before they escalate. Regular communication ensures everyone, from management to auditors, is informed, aligned and able to act quickly.

Bring In Experienced Professionals

This is not the time for on-the-job training. We’ve seen that companies relying on inexperienced staff or low-cost offshore resources often spend more time later fixing mistakes. SOX readiness demands professionals who have “seen it before,” understand both business and audit perspectives, and help management anticipate and resolve issues quickly and efficiently.

Set Realistic Expectations

Remediating control gaps takes time; proving that fixes work as designed takes even longer. Many companies underestimate this cycle, expecting a one-year transformation. SOX compliance is a multiyear journey. Progress, not perfection, might be a more appropriate goal in year one. The focus should be on building sustainable, repeatable processes rather than achieving a flawless audit immediately.

Integrate IT And Business Processes

IT systems form the backbone of internal controls. Business and technology leaders must work together to ensure systems are designed for scalability, data integrity and access management. For many organizations, this may mean migrating away from lightweight accounting tools and investing early in enterprise-grade systems. Including IT in risk assessments from the start helps identify critical systems, prioritize spending and prevent recurring control weaknesses later.

Turning Internal Controls into a Competitive Advantage

Internal controls both keep compliance in check and build confidence. A company that invests early in its control environment signals discipline and transparency to investors, boards and regulators. The payoff is clear, with smoother audits, reduced fees and fewer unpleasant surprises.

Conversely, those who ignore controls risk IPO delays and higher accounting and advisory costs as well as audit failures and repeated material weaknesses. All of this can, in turn, lead to a damaged reputation and loss of investor trust.

Strong internal controls enable leadership to focus on growth and strategy, rather than constant firefighting during audit season.

If you’re eyeing the public markets or preparing for a major transaction, don’t wait until the 11th hour. The path to a successful IPO relies on more than financial performance or market timing. You must build the framework, culture and internal controls that prove your company is ready for the next stage.