Companies in the highly regulated and rapidly evolving biotech industry face financial reporting risks related to ensuring that publicly listed entities report their financials correctly. The Risk Advisory team at Scrubbed has developed some best practices to help biotech companies mitigate these risks and ensure compliance with accounting standards and regulatory requirements.
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1. Implement Robust Internal Controls
If your company is a publicly listed entity in the United States, management is required to provide an assessment of the effectiveness of your internal controls for financial reporting. These controls should include:
- Segregation of duties: A system of checks and balances designed to ensure that no person has too much control over any task. Separating duties reduces the risk of fraud or errors and provides a safeguard against unethical behavior.
- Regular monitoring of financial processes: Scheduling regular reviews of financial reports and audits help ensure accuracy and compliance with regulations.
- Clearly defined approval authorities. Ensuring the work is distributed evenly helps ensure that no one person is responsible for too many tasks.
- Segregation of duties: A system of checks and balances designed to ensure that no person has too much control over any task. Separating duties reduces the risk of fraud or errors and provides a safeguard against unethical behavior.
The internal controls should cover manual and IT processes and any internal audit activities. It’s important to note that internal controls that work efficiently when a company is smaller or in startup mode may not work as effectively as the company scales. You’ll need to assess internal controls regularly to make sure they are robust as the company grows or its activities expand into new areas.
We also recommend educating your teams on the regulatory requirements and how robust internal controls benefit the business by helping prevent fraud, identify errors, and ensure the accuracy of financial reporting.
2. Ensure Compliance with Regulatory Requirements:
Since biotech companies require the huge funding amounts that are most commonly addressed by going public via IPO, most firms will be bound by the regulatory requirements of being publicly listed. In particular, the Sarbanes-Oxley Act (SOX) requires all publicly listed companies, including biotechs, to establish and maintain internal controls over financial reporting, ensuring the integrity of financial statements.
At Scrubbed we are experienced in helping companies establish accounting processes and internal controls that ensure compliance with SOX regulations and more accurate financial reporting.
3. Pay Attention to Accounting Requirements
We know biotechs operate under circumstances that can differ substantially from other industries, primarily due to specialized Research and Development needs and the complex process of running clinical trials. In addition to adhering to standard accounting principles like GAAP or IFRS, biotech companies must also follow specific accounting practices tailored to the industry. Some of these distinct accounting practices include:
- Revenue recognition: Biotech companies must carefully consider when to recognize revenue from the sale of their products. The timing of revenue recognition can significantly impact a biotech company’s financial statements.
- Research and development (R&D) costs: R&D costs can be a significant expense for biotech companies. The accounting treatment of R&D costs can also be complex.
- Liabilities: Biotech companies often have significant liabilities, such as those related to product liability and environmental remediation, which must be handled properly.
- Stock-Based Compensation: As with many technology-focused industries, biotech companies frequently compensate employees and key personnel with stock-based incentives. Proper accounting for stock options and equity grants is crucial to accurately reflect their impact on the financial statements.
- Valuation of Intangible Assets: Intellectual property, patents, and drug development rights are significant assets for biotech companies. Determining their fair value and assessing potential impairment is a critical accounting aspect of this industry.
- Revenue recognition: Biotech companies must carefully consider when to recognize revenue from the sale of their products. The timing of revenue recognition can significantly impact a biotech company’s financial statements.
Understanding the key financial and accounting regulations that apply helps mitigate the risks of providing inaccurate or incomplete financial statements, helping to build trust with investors and other stakeholders, and protecting the company from legal liability.
4. Deploy Effective Data Security Measures:
Biotech companies deal with sensitive information, including intellectual property, clinical trial data, and patient information. Ensuring robust data security measures is of paramount importance, and risk advisory accounting experts recommend the following steps :
- Assess Vulnerabilities: Evaluate the existing infrastructure, information systems, and data management processes to pinpoint areas that require improvement.
- Develop Risk Management Strategies: Based on the assessment findings, develop strategies to mitigate potential threats to data security, ensure regulatory compliance, and protect sensitive information from unauthorized access, data breaches, or cyberattacks.
- Implement Data Security Controls: Establish appropriate access controls, encryption protocols, and data classification frameworks to help prevent unauthorized access, detect potential breaches, and ensure the integrity and confidentiality of data.
- Run Training and Awareness Programs: Educating the workforce on potential risks and their responsibilities in maintaining data security helps create a robust defense against data breaches.
- Assess Vulnerabilities: Evaluate the existing infrastructure, information systems, and data management processes to pinpoint areas that require improvement.
5. Conduct Regular Internal Control Assessments:
The processes that work for you at the start may not be sufficient as you scale. Internal Controls (IC) assessments, which include periodic risk assessments, controls testing, and remediation of deficiencies, preferably from a third-party risk advisory team, are crucial to managing risk.. Regular review should include:
- Internal Controls: Review key controls, such as segregation of duties, approval processes, and access controls, to identify any weaknesses or gaps that could lead to financial misstatements or non-compliance.
- Regulatory Compliance: Regular compliance assessments help identify gaps or non-compliance with applicable laws, regulations, and industry standards. This includes assessing areas such as data privacy, intellectual property protection, clinical trial regulations, and product labeling requirements.
- Data Security and Privacy Assessment: Biotechs handle sensitive and confidential data, making them potential targets for data breaches and privacy violations. Regularly assessing data security measures, such as access controls, encryption, and employee training, helps identify vulnerabilities and implement necessary safeguards to protect sensitive information and comply with data protection regulations.
- Vendor and Third-Party Risk Assessment: Biotechs often rely on vendors and third-party service providers for various functions. Assessing the risks associated with these relationships is essential to ensure adequate controls and safeguards are in place. This assessment includes evaluating vendor due diligence processes, contract management, and ongoing monitoring to minimize the risk of fraud, data breaches, and compliance failures.
- Internal Controls: Review key controls, such as segregation of duties, approval processes, and access controls, to identify any weaknesses or gaps that could lead to financial misstatements or non-compliance.
How Scrubbed can help?
The biotech industry demands robust financial management, compliance, and risk mitigation. Engaging an outsourced risk advisory accounting team can deliver numerous benefits, including specialized expertise, enhanced risk management, compliance support, cost-effectiveness, and the ability for biotechs to spend less time on risk management and more on core competencies.
At Scrubbed, our Risk Advisory team works closely with cybersecurity and technical accounting experts to help you deliver accurate financial reporting, navigate complex accounting challenges, and mitigate potential risks, ultimately driving your long-term success.
