Navigating the audit maze: Essential steps for startups to successfully complete a financial review – SME News

Abhishek Gupta

India Ranking third in the world for the number of startups valued at over $1 billion, the country has a world-class entrepreneurial environment characterized by a unique combination of talent, innovation and markets. Opportunities are growing. But with a growing number of startups in India, there are reports of misreporting of financial information, raising demand for transparency in financial reporting by investors.

The past year has witnessed a series of major corporate governance lapses in Indian startups, sparking widespread concern, with several prominent venture-backed companies including BharatPe, Byju’s, Zilingo, Rahul Yadav’s 4B Networks and Trell reportedly grappling with governance issues.

The sudden increase in allegations of mismanagement has highlighted the importance of audits and has become a topic of discussion among entrepreneurs and investors. The knock-on effects are also evident in the investment environment: due diligence processes are becoming longer and discussions aimed at early detection of problems arising from oversight and deliberate actions have increased significantly. These discussions highlight the growing importance of preventive measures to prevent governance failures.

Recently, Minister of State for Corporate Affairs Rao Inderjit Singh also emphasised that transparency in financial reporting will increase foreign investor confidence and encourage capital inflows into the Indian economy..

To support startups, the Confederation of Indian Industry (CII) has also introduced a Corporate Governance Charter that aims to provide stage-specific guidance on effective governance practices, catering to the changing needs of startups going through different stages of growth. This shows that transparency in financial reporting and effective corporate governance are at the heart of today’s discussions.

How to approach an audit

As modern startups focus on rapid idea development, continuous product improvement through user feedback and data analysis, and adopting agile strategies, they inevitably face initial hurdles in raising funds, hiring talent, and effectively marketing their products.The leading reason startups fail is due to running out of cash, often due to management failing to hit key milestones before exhausting available funds.

In this hustle and bustle, effective financial reporting can get put on the back burner. This leaves startups plagued with legal complexities, rising operational costs, lack of strategic clarity, conflicts with investors, and discord among internal teams. As companies gain momentum, attract new investments, and scale their operations, the need for financial audits becomes more and more apparent. Building confidence in the timing and approach of audit preparation is therefore crucial to a company’s success.

How to stay audit ready

Startups can stay audit-ready by combining strategic practices with preventative measures. As part of implementing strong internal controls, startups can start by distributing responsibilities among team members to reduce fraud risk. For example, the person who approves expenses and the person who processes payments should not be the same person. It is also important to establish clear procedures for approving financial transactions. This might include multiple levels of approval for large expenditures and specific signing authorities for different transaction types.

Another important aspect is compliance. Startups preparing for an audit should continually keep track of changing regulatory requirements in their industry. This can include subscribing to industry newsletters, attending webinars, joining professional associations, etc. Leveraging technology and automating reconciliation and reporting processes can help startups increase efficiency and reduce human error. Implementing systems such as SharePoint or Google Drive for organized, secure document storage can help startups easily access all documents they need during an audit.

Before going for an audit, startups should hire external advisors for regular reviews. Scheduling regular check-ins with financial consultants can help you get an outside perspective and identify potential issues before they become problems. New-age ventures can also seek advice from external auditors on complex accounting issues to prevent costly mistakes.

While you have processes in place, it’s important to educate staff on their role in maintaining compliance. This includes training on industry regulations, internal processes, and potential risks. Consider also conducting security awareness training to protect against cyber threats.

It is also important to address previous audit findings by thoroughly evaluating and correcting any issues found in the previous audits. These experiences should serve as learning opportunities to improve the internal control framework. In addition, conducting regular internal reviews throughout the year will ensure that controls remain appropriate and effective. At the same time, enterprises need to be flexible and quickly adapt to changes in the business environment.

In summary, careful planning and strategic partnerships allow companies to seamlessly align with their growth trajectory through timely audits. While audits may seem daunting, startups that foster sound financial practices and stay vigilant on regulatory changes can approach these reviews with confidence and ultimately emerge as more resilient companies. The cornerstone of success lies in thorough preparation, continuous improvement of processes, and leveraging expert insights to maintain compliance and financial accuracy. By adopting this approach, startups will not only excel in financial due diligence, but also strengthen their reputation and instill confidence among investors and stakeholders.

Abhishek Gupta is the Founder and Managing Partner at Pierag. The opinions expressed here are personal. Reproduction of this content without permission is prohibited.

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