As pre-IPO companies focus on growth, market positioning, and scaling operations, one crucial investment often gets overlooked: internal audit and risk management. Companies rushing toward their public offering might perceive these functions as a regulatory requirement only relevant once they’re listed. But the truth is that introducing internal audit and risk management early can be a strategic advantage, provide a competitive edge, enhance stakeholder confidence, and ensure long-term success — driving value well before ringing the opening bell. Here are the top reasons why companies should prioritize internal audit and risk management as they embark on their IPO journey.

1. Building a Foundation of Transparency, Trust, and Credibility

Going public is more than just a financial milestone; it’s about earning and maintaining the trust of investors, regulators, and the broader market. Pre-IPO companies are often laser-focused on achieving rapid growth, but this can lead to overlooked operational risks, compliance gaps, or control weaknesses that could snowball into significant issues post-IPO. By embedding internal audit early, companies establish rigorous controls, ensure transparency, and set the tone for a culture of accountability and signals the company’s commitment to potential investors.

According to a study by PwC, companies with strong internal audit functions are more likely to attract institutional investors and achieve higher valuations during their IPOs (PwC, “State of the Internal Audit Profession Study,” 2023: https://www.pwc.com/us/en/services/consulting/risk-regulatory/library/internal-audit-transformation-study.html).

2. Strengthening Corporate Governance

The journey to an IPO requires companies to develop a mature and well-structured governance framework quickly. Internal audit isn’t just about compliance; it’s a critical enabler of informed decision-making. An effective internal audit team provides the executive leadership and board with insights into operational efficiency, process improvements, and risk exposure. By proactively identifying and addressing potential risks, internal audit helps leadership navigate uncertainties and seize opportunities, allowing the company to focus on scaling with confidence. This proactive approach is particularly valuable during the intense scrutiny that accompanies the IPO process.

The Institute of Internal Auditors (IIA) emphasizes that internal audit serves as a cornerstone of effective governance, providing objective assurance and advice to management and the board (IIA, “Internal Audit’s Role in Corporate Governance,” 2021: https://www.theiia.org/en/content/articles/2021/june/internal-audits-role-in-corporate-governance/).

3. Proactive Risk Identification and Mitigation

Every company faces risks, but the nature and impact of these risks can change dramatically as the company prepares to go public. An effective internal audit and risk management function helps identify and address these risks before they become significant issues.

• Risk Management: Implementing internal audit before going public allows a company to proactively identify operational, financial, and compliance risks that could derail the IPO process or harm the company’s reputation post-IPO.
• Crisis Avoidance: By identifying potential risks early, companies can develop strategies to mitigate them, avoiding crises that could lead to financial loss, regulatory penalties, or damage to the company’s reputation.

A study by Deloitte found that companies with mature risk management practices, including robust internal audit functions, outperform their peers in terms of financial performance and resilience (Deloitte, “Global Risk Management Survey,” 2023: https://www2.deloitte.com/us/en/insights/topics/risk-management/global-risk-management-survey.html).

Additional Benefits of Early Internal Audit Implementation

While building investor confidence, strengthening corporate governance, and proactive risk management are considered the top three reasons to invest in internal audit, there are several other benefits worth noting to implementing the function before going public:

1. Strategic Alignment: By aligning risk management with the company’s strategic objectives, internal audit ensures that risks are managed in a way that supports the company’s long-term goals.
2. Operational Efficiency: Internal audit can identify process improvements and cost-saving opportunities across the organization.
3. Regulatory Compliance: Early implementation helps ensure compliance with relevant regulations and standards, reducing the risk of penalties and reputational damage.
4. Talent Development: Internal audit may serve as a training ground for future leaders, providing exposure to various aspects of the business.
5. Sustainable Growth: Internal audit helps ensure that the company’s growth is sustainable by identifying and managing risks that could hinder long-term success.
6. Cybersecurity Assurance: With increasing cyber threats, internal audit can play a crucial role in assessing and improving cybersecurity measures.
7. ESG Readiness: As Environmental, Social, and Governance (ESG) factors become increasingly important to investors, internal audit can help companies develop and validate their ESG reporting processes.

Conclusion

The journey to becoming a public company is challenging, but investing in a robust internal audit is more than a “nice-to-have” and implementing it early in the process can make a significant difference. By embedding internal audit early, companies build trust, strengthen governance, and position themselves for a smoother, more confident transition to the public markets. In the fast-paced world of growth and expansion, the untapped value of internal audit lies in its ability to transform potential risks into opportunities and ensure that the journey from private to public is as successful as possible. Companies that invest in these areas are better positioned to succeed in the public market, achieve higher valuations, and ensure long-term sustainability.