As You Add Team Members – Add Controls
Start-ups and early stage companies have many things competing for attention, and founders and management have a multitude of items on to-do lists that need to be prioritized and executed upon. It is likely that internal controls are not high on the priority list. However, as your company grows, and you begin adding team members to the employee roster, it is worth considering your internal control environment to ensure that you are protecting the company and its prospects for long-term success.
An internal control is a process designed to achieve an objective. The objective is typically to achieve a degree of assurance about some aspect of the company or its operations. For example, internal controls are designed to help mitigate risk regarding cash handling and provide a level of assurance that cash will not be misappropriated. Internal controls can also be implemented to help provide assurance that a company’s intellectual property (“IP”) is being properly protected and is not subject to an unreasonable risk of misappropriation. No control will ever provide an absolute assurance or guarantee that misappropriation will not occur or that all risks have been fully mitigated. However, strong internal controls do provide reasonable assurance against identified risks, reducing the probability of occurrence and negative implications.
The sophistication of the control environment will vary with the size, sophistication, and nature of the specific company. However, as a general rule, as a company grows (in assets, revenue, and/or employees) its internal control environment should become more formalized and comprehensive. For example, if the founder is sole owner and employee in the company, there is little reason to consider internal controls governing cash and other assets. However, as new owners become stakeholders or new team members are added, the stakeholders concern regarding proper and effective use of funds will become more of a concern, and the development of internal controls may become an important component of the go forward strategy.
A central theme of a control environment is identifying risks to the achievement of your objectives and then designing a system to manage or mitigate those risks. The process may proceed as follows:
Assess the identified risks
Evaluate potential responses to the risks
Design control activities
Implement and communicate control activities
Monitor and assess efficacy of control activities
As you see from the last step, this can be a continuous process. That does not mean it has to be an all-consuming exercise, but the control environment should be assessed periodically and modified or updated as necessary. Earlier stage companies can succeed with less formal and comprehensive controls, possibly focusing on use of company funds and IP protections initially. As the company grows and matures, additional areas of focus will need to be incorporated into the control environment, for example, controls around financial reporting or proper social media usage. It really boils down to ensuring that your control environment scales in scope and sophistication in line with your business.
RubinBrown has a dedicated Life Sciences and Technology Services Group specializing in serving life sciences and technology based companies, including assisting startup and early stage companies and consulting on IP management and strategy.
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