How portfolio companies can create additional value through internal controls

By Jason Menghi, Audit & Assurance Partner and National Private Equity Leader, Deloitte & Touche LLP

Talking points

• It’s not unusual for private equity (PE) companies to overlook the importance of internal controls accounting as a driver of portfolio company value.
• However, modern and efficient internal controls can have a major impact on a portfolio company’s worth, while enhancing the sales process.
• The steps outlined ahead can help improve the quality of internal controls and increase overall PE portfolio value.

Private equity firms are often looking for ways to boost the value of their portfolio companies. But in this quest, there’s one powerful lever that often gets overlooked: internal controls. Finance and accounting professionals generally think of internal controls as part of the financial compliance management system. They are, but they’re more than that. Internal controls can also:

• Reduce costs, inefficiencies, and errors.
• Deliver insights about positive business performance.
• Provide reliable financial information on demand.

Outcomes like these can drive value and streamline the sales process. What, then, does it take to elevate a portfolio company’s internal controls to a level that creates additional value?

Set an effective tone

A culture of focusing on processes and controls as a business imperative can lay the groundwork for producing more timely, reliable financial information. It typically takes the commitment of the entire leadership team—not just the chief financial officer (CFO)—to convey the importance of efficient, well-controlled processes to the company’s success. A unified leadership front can also encourage employees to challenge the status quo of outdated operational and financial reporting methods and identify better processes.

While CFOs will likely have to lead the organization through this shift in mindset, control owners also play a major role. They can educate employees on how a well-managed program of controls can help improve operational excellence, increase the quality of information, and raise the company’s value.

Consider an operational assessment

Resources can be a challenge for privately held companies, particularly when specialized skill sets may be required. So how do you know if the people and other resources needed for quality internal controls are in place? One way is to perform a strategic operational assessment focusing on people, processes, and technology. An operational assessment identifies which critical processes might be prone to errors and what could happen if those errors were to occur.

After identifying the relevant risks, the company may consider creating a prioritized risk management plan and close identified gaps by formalizing the company’s processes. Improvement can mean new technology and automation, but it doesn’t have to. It could also mean redesigning a process or overhauling the finance operating model for greater efficiency and effectiveness.

Periodic reassessments can help CFOs gauge how well the improvements are working and factor in significant changes that could affect the company’s ability to produce timely, accurate, and reliable financial information.

Understand your IT stack

New technology isn’t always necessary to get value from a portfolio company’s data and improve internal control efficiency. Before investing in another enterprise resource planning system, find out whether:

The company is using the functionality it already has. It’s not unusual for businesses to invest in comprehensive software packages but use only part of them. It may be possible to improve the control environment just by fully harnessing the existing technology.

There are more cost-effective ways to automate. You may be able to replace manual tasks with current system capabilities or intelligent automation and improve data quality while you’re at it.

The company really has outgrown its current technology platform. It’s possible to benefit from these first two steps and still need more robust technology to meet your business imperatives.

Don’t underestimate the importance of reliable, sustainable IT infrastructure. Not only can it streamline financial reporting and operations, it can also enable internal reporting that helps management make more timely and meaningful business decisions.

Ready for action

To learn more, check out the recent Deloitte publication, “Internal controls: A hidden driver of value creation at portfolio companies.” And if any of these thoughts resonate with you, please get in touch. I’m happy to explore ways to help you create value and reduce risks through internal controls in your own organization.