Financial audits can seem intimidating – but as they offer an opportunity to provider regulators, investors and others with clarity and reassurance they’re nothing to fear. It’s all about preparation, culture and going step by step…
1. Understand the regulatory requirements
Before diving into specifics, you’ll need a grounding in the regulatory requirements that govern equity compensation plans. This includes understanding accounting standards, such as ASC 718 in the U.S., which deal with stock-based compensation. Knowing these regulations in-house or engaging with a trusted third party can help you remain compliant and avoid potential pitfalls during the audit process.
2. Maintain accurate, detailed records
At audit time accuracy is everything and a culture of meticulous record-keeping can be your best friend. This includes recording grant dates, vesting schedules, exercise prices and any modifications to your plan in the interim. Utilizing reliable software solutions like J.P Morgan Workplace platform to track and manage these records can work better than manual solutions. If you’re working with a partner or service-provider check that they use a system with audit-friendly communication threads.
3. Conduct your own audit
Practice makes perfect. Performing regular internal audits can help to identify discrepancies and areas for improvement before the official audit. This proactive approach allows you to address any issues early, ensuring that your financial reporting is accurate and compliant. Internal audits also provide an opportunity to refine processes and enhance the overall management of your equity compensation plan.
4. Engage experienced professionals
Can you really ‘leave it to the pros’? Many companies choose to outsource some or all of their equity compensation program administration with a partner who facilitates easier and more accurate financial reporting and audits. Whether it’s hiring a consultant or working with an experienced team like Workplace Solutions, having the professional support available can make a huge difference to your preparations for an audit.
5. Set up strong internal controls (and never stop reviewing them)
Further to point 3 good audit hygiene begins ‘at home’ with your internal rulebook. This includes setting up checks and balances that can help to identify and prevent errors and fraud, as well as ensuring that all processes are transparent and well-documented. Regularly review and update these controls to adapt to any changes in regulations or company policies.
6. Prepare your documentation
If it’s not written down it can’t be proven: documentation is king. Your records should include detailed explanations of your equity compensation plan, methodologies used for valuation, and any assumptions made. Think ‘what will make this easiest for an auditor?’ and work backwards from there. If you can’t clearly see the information you need then an auditor is unlikely to be able to see it either.
Talk to us
At J.P. Morgan Workplace Solutions our team of professionals is experienced in providing personalized support to help companies of all sizes around the world with their equity compensation needs. Regardless of the industry you’re in or the company stage you’re at if you would like to find out more then get in touch.
This publication contains general information only and J.P. Morgan Workplace Solutions is not, through this article, issuing any advice, be it legal, financial, tax-related, business-related, professional or other. J.P. Morgan Workplace Solutions’ Insights is not a substitute for professional advice and should not be used as such. J.P. Morgan Workplace Solutions does not assume any liability for reliance on the information provided herein.
