By Abhishek Gupta
India holds the third position globally for startups valued at over $1 billion, the country’s global entrepreneurial landscape which is distinguished by its unique combination of talent, innovation, and market opportunities. However, the growth of startups in India is followed by reports of misreporting of financials, calling for transparent financial reporting by investors.
Over the past year, a series of significant corporate governance lapses were witnessed at Indian startups which has sparked widespread concern. High-profile, venture-backed companies have reportedly grappled with governance issues.
This surge in alleged mismanagement cases has highlighted the importance of audits, becoming a focal point of discussions among entrepreneurs and investors alike. The ripple effects are evident in the investment landscape. Due diligence processes have become more protracted, and there’s been a noticeable uptick in conversations aimed at early detection of problems arising from oversight or deliberate actions. These discussions underscore a growing emphasis on preemptive measures to safeguard against governance failures.
Recently, Rao Inderjit Singh, Minister of State for Corporate Affairs, also emphasized that transparency in financial reporting enhances the confidence of foreign investors and facilitate capital flow into the Indian economy.
How to approach audits
Modern startups focus on rapid idea development, continuous product improvement through user feedback and data analysis, and adaptation of agile strategy. They invariably face initial hurdles in funding acquisition, talent recruitment, and effective product marketing. A primary cause of startup failure is cash depletion, often due to management’s inability to achieve critical milestones before exhausting available funds.
In all this hustle, the effective financial reporting sometimes takes a back seat. Due to this, nascent companies may also end up wrestling with legal complications, escalating operational expenses, lack of strategic clarity, investor conflicts, and internal team discord. As the company gains momentum, attracts new investments, and expands operations, the necessity for financial audits becomes increasingly evident. Consequently, developing confidence in the timing and approach to audit preparation is vital for the company’s success.
How to maintain audit readiness
Startups can maintain audit readiness through a combination of strategic practices and proactive measures. As part of implementing strong internal controls, startups can start by distributing responsibilities among team members to reduce fraud risk. For instance, the person approving expenses shouldn’t be the same one processing payments. It is also important to establish clear procedures for authorizing financial transactions. This might include multi-level approvals for large expenditures or specific signing authorities for different transaction types.
Another important aspect is compliance. A startup preparing for audit must continuously track evolving regulatory requirements in the industry. This could involve subscribing to industry newsletters, attending webinars, or engaging with professional associations. By leveraging technology and automating processes for reconciliations and reporting, startups can increase efficiency and reduce human error. By implementing systems like SharePoint or Google Drive for organized and secure document storage, startups can ensure all necessary documentation is easily accessible during audits.
Before heading into an audit, a startup must engage external advisors for periodic reviews. Scheduling regular check-ins with financial consultants will help them gain external perspectives and identify potential issues before they become problems. The new-age ventures can also seek advice from external auditors on complex accounting issues and prevent costly mistakes.
While they put processes in place, it is important to make sure educating staff on their roles in maintaining compliance. It can include training on industry regulations, internal processes, and potential risks. You may also consider implementing Security Awareness Training to protect against cyber threats.
It is also important to address previous audit findings, if any, by thoroughly assessing and remediating any issues identified in previous audits. These experiences should be learning opportunities to improve internal controls framework. Additionally, performing regular internal reviews throughout the year will ensure that controls remain relevant and effective. At the same time, the company should stay flexible and quick to adapt to changes in the business environment.
To sum up, through meticulous planning and strategic partnerships, enterprises can seamlessly align with their growth trajectory through timely audits. Although audits may appear daunting, startups that cultivate sound financial practices and remain vigilant about regulatory shifts can approach these reviews with assurance, ultimately emerging more resilient. The cornerstone of success lies in thorough preparation, ongoing refinement of processes, and harnessing expert insights to maintain compliance and financial precision. By adopting this approach, startups not only excel in financial scrutiny but also fortify their reputation and instill confidence among investors and stakeholders.
Abhishek Gupta is the Founder and Managing Partner at Pierag Consulting LLP. Views expressed are personal. Reproducing this content without permission is prohibited.