Confirming the robustness of financial processes and controls is a vital part of the IPO process. Due to the demands of an IPO transaction, this workstream is one that's often left until late in the day, in favour of higher profile transaction demands for long-form reporting, tax structuring, and book building, in addition to the ongoing day to day needs of the business. Left too late though, this area can become the key stage gating item to your IPO – and to your success as a listed entity beyond.
Many years ago, FPPP was often considered to be largely a tick-box exercise as part of the overall IPO process. But increasing scrutiny on both governance and efficiency has raised the focus on this aspect – which is a responsibility for Boards at the point of IPO and on an ongoing basis thereafter. An organisation’s FPPP comprises a set of procedures that enable the directors to be informed on a regular basis as to the financial position of a company and its group, its projected results (including profitability and cash flow), and any changes to those. Strong FPPP needs to be well-designed, embedded, and – crucially – evidenceable to demonstrate the good governance that the market wants all participants to have in place.
In response to a series of corporate failures, reforms are being introduced across all market segments. For most Main Market companies, the Financial Reporting Council (FRC) recently strengthened the UK Corporate Governance Code (the UKCG Code), published on 22 January 2024 and effective for accounting periods from 1 January 2025. Similarly the QCA Code, the corporate governance code applied by the majority of small and mid-size quoted companies on AIM, was reviewed and updated in November 2023.
These reforms, driven by the growing demand for heightened transparency, accountability, and sustainability hold significant implications for any listed company's existing FPPP and for any IPO candidate’s planning. While only a small number of changes are being introduced, the focus on enhanced internal controls sets to raise the bar on listed companies’ internal control and risk management frameworks.
Why does it matter?
An IPO often necessitates a transformation of your company's internal control and corporate governance framework to meet the requirements of the listed environment. This will often represent a step change in how a prospective listed business will operate. Adding the latest reform to the mix further heightens the pressure on the finance team to comprehend and ensure compliance with the new requirements. Staying informed or seeking expert guidance can alleviate this pressure.
Early adoption empowers companies to learn, adapt, and refine their practices. Companies that embrace these changes well in advance of an IPO are better-positioned to adapt seamlessly to the demanding listed environment. Operating as if you are a listed company from an early stage offers ample opportunities to evaluate what works well and what can be improved well ahead of your perceived 'go' date and avoid undertaking remediation work mid-transaction.
Agility is paramount in staying ahead of the reform curve. Preparing your company's FPPP with an eye on the broader capital market reform agenda sets your business apart. The reform raises the bar for companies competing for capital, particularly when transparency, sustainability, and accountability become the key differentiating factors for investors in capital allocation decisions.
Many companies consider an IPO as part of their long-term growth strategy. We outline 10 considerations for getting it right.
IPO readiness: ten key considerations
Key considerations of UK corporate governance reform on FPPP
Establish process for reporting on material controls effectiveness
FPPP places a strong emphasis on the effectiveness of internal control systems, with a key focus on nurturing the appropriate organisational culture to ensure effective implementation. The UKCG Code has long mandated companies to establish, monitor, review, and annually report on the effectiveness of their risk management and internal control systems. However, the FRC, in its 2023 Consultation Document, has highlighted a deficiency in the reporting of these systems, particularly in terms of the operational details and the efforts made to sustain their effectiveness. Our 2023 Corporate Governance Review also reveals that only 50% of the FTSE 350 companies provide insight into their internal control process reviews.
The UKCG Code reform takes a step further by compelling the Boards of UKCG Code-Companies to issue an annual declaration on the effectiveness of the companies’ material controls effective albeit this delayed in its implementation to January 2026 (Provision 29). The revised UKCG Code also sets out clearer expectations of the details required in the Board disclosure of internal control effectiveness. The QCA code introduces similar enhanced disclosure expectations, effective for accounting periods starting from 1 April 2024 around what a Board should do to ensure the identification, assessment, and management of risk, both current and emerging, and how they obtain assurance that the risk management and related internal controls are effective.
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Directors of companies thinking of an IPO must take proactive steps in establishing appropriate procedures and gathering the necessary evidence to underpin their annual declarations. This process should commence with a comprehensive review of the existing internal control framework and risk management system to ensure they continue to support the company's specific circumstances. It's important to ensure that control owners are appropriately designated to their respective day-to-day job responsibilities to foster accountability and encourage ownership of their roles.
Furthermore, clear communication of the expectations regarding both the quality and quantity of evidence required to validate the implementation of controls is paramount. This communication should encompass all relevant parties involved in the process.
Enhance underlying control activities
As part of the annual board declaration on internal control, UKCG Code companies are required to describe any material controls which haven't operated as effectively as the balance sheet date and the action taken and planned to remediate these gaps. This requirement fosters a fair and balanced reporting, while motivating companies to proactively mitigate the risk of internal control failures. The consequences of not doing so would be the obligation to disclose such weaknesses, which could have serious credibility or market consequences for publicly-listed companies.
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In fulfilling these responsibilities, companies should conduct thorough independent reviews of their current entity and process levels controls, specifically targeting areas where historical breakdowns have occurred and issues persist. The review should pinpoint areas with a higher risk of control failures or where controls are deficient, and help companies to strategically plan remediation efforts, prioritising them based on their criticality and the potential impact they may have.
Strengthening controls involve, among others, enhancing control activities through automation where possible, reducing the intervals between control implementations as appropriate, and increasing the frequency of testing. In cases where issues have previously been identified, companies must ensure that they're promptly addressed well in advance of an IPO and in any case don't extend beyond the IPO stage.
Report meaningfully on ESG
The various initial proposals for more prescriptive Environmental, Social and Governance (ESG) requirements in the UKCG Code have been dropped in the 2024 reform. However, in a similar vein, Provision 29 of the 2024 UKCG Code includes reporting controls as one of the material controls for Board considerations. For a large number of companies, this does include ESG reporting, either mandated by legislations such as TCFD reporting and/or Gender Pay Gap Report or through voluntary disclosures.
The QCA code introduces more explicit changes to ESG through a new requirement to provide appropriate quantitative and qualitative reporting of environmental and social matters in annual reports. The annual report should describe the related issues that the board has identified as material with reference to its purpose, strategy, and business model, as well as any relevant KPIs and forward-looking targets.
This shouldn't come as a surprise to many as it has been one of the key focus areas for many businesses for several years. However, we're seeing data availability, timeliness, and reliability in ESG reporting remain key blockers for reporting on ESG meaningfully, as these are the areas where businesses often have challenges articulating due to limited experience.
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When preparing the FPPP, sufficient attention should be given to the company’s external reporting obligations, including ESG reporting. To report on ESG meaningfully and have better controls over the data and its report, the first step is defining the company’s ESG strategy and the measures of success. This allows businesses to set appropriate KPIs for monitoring progress and targets, ensuring deviations can be explained. An obvious but often overlooked factor when selecting KPIs is aligning them with the strategy. This is particularly true for ESG as it covers a wide range of areas, so it's unlikely that two or three KPIs cover all the three strands of ESG.
Lack of data availability shouldn't hinder meaningful reporting on ESG goals, as organisations should measure what they value, not vice versa. Once an organisation has clarity on its ESG strategy and KPIs, efforts should focus on improving the reliability and availability of the data to measure them. An effective approach to managing data quality is to consider, among other, adoption of lineage tooling to track data origins and destinations, and dictionaries to ensure users understand data better. Effective technology solutions can be the engine room that empower the data collection and reporting. Timeliness of reporting is then an act of balancing data availability and data relevance.
Tone at the top is equally important. As ESG gains significance, key considerations should include the roles of a Sustainability Committee which helps the board oversee the ESG-related risks, opportunities, strategies, performance and disclosures. While currently not mandated by either corporate governance codes, we're seeing that there has been growth in the numbers of companies with Sustainability Committee Furthermore, it's worth noting that FRC issued a guidance in the UKCG Code on the roles of the Sustainability Committee despite not mandating them, underscoring their increasing importance.
What should you do now?
To gain a competitive edge, we encourage management to start thinking about their FPPP at an early stage, considering the reform’s impact on current arrangements, and exploring opportunities for enhancement. Engage in conversations and collaborate with advisers to evaluate any deficiencies in the existing setup compared to the new requirements and allocate resources accordingly to rectify these gaps. In the period leading up to the IPO, establish a regular review process for the FPPP to ensure it remains up to date.
It's crucial to recognise that the FPPP shouldn't be an afterthought or a mere compliance exercise; instead, it should be a dynamic and integral process throughout the entire lifecycle of a listed company. In this case, as with many others, taking proactive measures will help companies get ahead of the curve.
For more insight and guidance, get in touch with either Danial Zulkefli or Simon Davidson.
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