Internal Controls for Life Sciences Startups: The “Pre-Audit” Checklist
Life sciences startups are typically not laser-focused on anything beyond innovation and their current projects, and finding the funding they need to keep it all going.
However, without proper internal controls and SOPs, compliance and regulatory approvals may be challenging.
So, what kind of internal controls are needed? Every life sciences startup shares some commonalities in the financial realm. They often need to navigate complex regulatory environments and funding milestones, making strong controls essential.
When an audit is forthcoming (and that’s a case of when, not if), when preparing to scale, or if you need to provide due diligence to investors, this pre-audit checklist will help you avoid unpleasant surprises when it’s all said and done.
Set Up Your Controls Early in the Game
The experts at Growise recommend establishing internal controls as soon as possible. Waiting until the company grows is a mistake you’ll come to regret.
Here are a few reasons why that’s true:
Startups rely on grant funding and investment capital
Clinical trials are heavily regulated with government oversight
R&D costs are high
Revenue is delayed
Sensitivity of intellectual property (IP)
Weak controls can lead to unreliable financial statements, compliance issues, delayed funding, and lost investor confidence, any of which can lead to project or company failure.
Knowing an audit is coming, you must be prepared. Beyond reducing the stress of the audit itself, you’ll build credibility with your stakeholders and build strong foundations for what’s to come.
Preparing For the Audit: Get in the Mindset
What’s the most important thing about an audit? Spoiler alert, it’s not just about passing. Sure, the auditors are looking for specific things, but from a higher level, it’s more about transparency, discipline, and showing your investors that you are capable of scale.
So, before you begin, ask yourself a few questions:
Can anyone outside the company understand and trust our numbers?
Are the company’s processes well-documented, consistent, and repeatable?
Is the startup protected from errors or fraud?
If you aren’t sure how to answer these questions, our checklist will help you build confidence until you can answer in the affirmative.
A 10-Step Pre-Audit Checklist for Life Sciences Startups
Each point has its own checklist.
Financial reporting and controls
Your financial statements are the foundations of the audit, so they must be accurate.
Maintain clean, up-to-date financials (ongoing).
Close each month.
Use modern technology such as QuickBooks Online or NetSuite.
Reconcile all key accounts monthly.
Document all accounting processes and provide a rationale for revenue recognition, capitalization of R&D expenses, and other accounting policies.
Ensure all items are properly classified (i.e., R&D expenses, capitalized costs, grants, other revenue).
Avoid blurred lines between R&D and operating expenses, as they can lead to misstatements.
Segregate financial functions
Ensure no one person controls an entire financial process. Here are a few examples of where duties should be segregated:
Authoring transactions
Recording transactions
Reviewing transactions
Understandably, this might be challenging for a small team. In best practice, however, the person approving the invoices should not be processing payments without oversight. Fraud and errors are two significant audit concerns, and this is how you can avoid them.
Implement expense controls
Expenses can spiral out of control without adequate monitoring.
Require approval for all expense payments
Create budgets and enforce spending limits for departments and employees
Use company credit cards and enable monitoring tools
Establish a standard, documented reimbursement policy
Review expense reports regularly
Funding compliance for grants checklist
Non-compliance with grant requirements may result in the loss of funding or disqualification from future grants.
Track all grant spending separately
Ensure grant funds are used for the purposes they are intended
Maintain documentation for allowable costs and time tracking
Reconcile grant reports to accounting periods
Payroll and equity checklist
Startup compensation can be complex as it often combines salary, bonuses, and equity payments. Inadequate tracking of stock and equity payments can create many issues during an audit or an acquisition.
Use an established payroll provider.
Reconcile payroll reports to the general ledger
Maintain up-to-date employee contracts and bonus structures for review
Track stock options and equity separately
Obtain board approval for equity payments
Vendor and procurement checklist
As a startup, you’ll likely have several vendors. Documenting their deliverables is essential in an R&D-heavy environment.
Maintain a current list of approved vendors
Execute contracts for important or ongoing partnerships
Match vendor invoices to POs, contracts, and deliverables
Ensure all invoices are reviewed and approved before payment
Documentation
Keep in mind, from an auditor’s POV, if it’s not documented, it doesn’t exist.
Maintain an organized, central system for legal document storage. Ideally, this should be a cloud-based solution for added security.
Enforce consistent file naming hierarchies for fast retrieval.
Enforce versioning for critical documents.
Keep copies of contracts, board meeting minutes, invoices, grant agreements, etc.
Data integrity and security
Don’t assume that just because you’re small, security isn’t critical.
Enable role-based access for financial systems
Enforce strong passwords and multi-factor authentication policies
Back up data regularly or use a continuous backup system
Have IT monitor logs for data breaches or system failures
Align to regulatory environments
Traceability and transparency are essential if financials are to withstand auditor scrutiny, as financial data should align with regulatory filings.
Align financial processes to relevant regulatory mandates
Ensure clinical trial expenses and manufacturing costs are traceable
Enable collaboration between financial and compliance teams
The role of leadership: reviews and oversight
Executive leadership must actively review controls to ensure alignment across teams. The board should receive regular financial updates to ensure they are always informed.
Conduct financial reviews monthly.
Compare the budget to actual expenses and income
Investigate and resolve anomalies immediately
Document all review processes and obtain sign-offs
The Bottom Line: Build Controls Before You Need Them
Scrambling to implement controls when an audit looms is not the best use of your time and resources. Use this checklist as a sort of “pre-audit,” and you’ll always be able to stand up to any scrutiny.
Need help with this? The experts at Growise are here for you. Set up a call today, and let’s get started.