Common pitfalls in meeting IPO FPPP requirements

Completing a Financial Position and Prospects Procedures (FPPP) Memorandum is a vital part of the London IPO process, whether your company intends to be listed on the Main Market or AIM. Your company directors need to ensure that appropriate procedures are in place for establishing and reporting the company’s financial position and prospects. For them to be able to sign their Board Memorandum, considerable preparatory work is usually needed.

Based on our experience as FPPP Memorandum Advisers, management teams face several common pitfalls.

Not fully understanding what is needed to meet the FPPP requirements

For many management teams, the IPO process will be a new experience. Failing to understand exactly what is involved in completing the FPPP Memorandum and achieving the broader listing requirements is understandable.

For example, the FPPP covers wide-ranging areas, typically including:

• The high-level reporting environment
• Forecasting and budgeting
• The management reporting framework
• Financial accounting and reporting
• Significant transaction complexity, potential financial exposure or risk
• Strategic projects and initiatives
• IT environment.

Regulatory guidance identifies the procedures companies should establish in each of these areas. For example, the numerous requirements relating to high-level reporting address issues such as financial accounting procedures and IT controls, board composition, management culture, whistleblowing and segregation of duties, to name a few.

Failure to understand what is required to meet the FPPP requirements could leave companies exposed in some areas, with urgent action needed to avoid any unnecessary delays in the IPO process. However, there is also the risk of management undertaking unnecessary activities by failing to properly agree on the scope of work with their reporting accountants, wasting time and resources.

Overestimating the quality of the company’s governance, risk and control environment

Management teams frequently assume their existing governance framework has been appropriately documented and is fit for purpose when this is not the case. They also regularly underestimate the requirements of the UK Corporate Governance Code. The FPPP process can therefore reveal the need for substantial improvements.

Similarly, many companies believe that they manage risk effectively. However, the FPPP work usually finds only rudimentary risk frameworks in place if there is one at all. This is typical for newer companies that have grown rapidly and haven’t had the time to establish proper risk mechanisms.

Internal teams can also overestimate the quality and effectiveness of the control environment around financial management and reporting. There is often incomplete documentation of controls and, as a result, inadequate assessment and testing of the control environment.

Therefore, the FPPP process can be useful to pinpoint critical gaps that need to be filled across the company’s governance, risk, and control frameworks. More remediation work is likely to be needed than management initially assumes. This is time-consuming and requires substantial human resources to resolve before listing.

Starting to think about FPPP requirements too late in the IPO process

Given the challenge of understanding FPPP requirements and the risk of overestimating the company’s current position, many management teams fail to focus on their FPPP Memorandum early enough in the IPO process. As a result, there is a rush to map processes, identify gaps in the governance, risk and control framework, and ultimately complete necessary remediation work.

Failure to start early also enough means that the FPPP Advisers are not involved in timely conversations with other parties, such as the reporting accountants, brokers and lawyers. This makes it harder to understand these parties’ exact requirements and more challenging to manage their expectations.

Not knowing how to project manage FPPP activities effectively

Completing an FPPP Memorandum involves completing many tasks in wide-ranging areas across the business. It requires coordination internally across management teams and externally with key stakeholders. It, therefore, depends on effective project management.

Not surprisingly, many organisations are unlikely to have within their teams of individuals experienced in managing such complex projects and dealing with external stakeholders. This exposes them to the risk of missed deadlines set by IPO sponsors, potentially raising doubts about the company’s suitability for listing. The company may fail to manage expectations in ways that could damage its IPO prospects.

Forgetting the need to complete post-IPO actions

FPPP work will typically identify areas for remediation, but not all of these will have to be addressed before the IPO. Negotiations with the reporting accountants will establish priority issues while also enabling management to defer some actions until after the listing. For example, a major upgrade of some IT systems could be left until after the IPO is completed. Given the huge effort and stress faced by management in the run-up to a listing, the desire to relax afterwards is understandable. However, agreed actions need to be completed in order to demonstrate the company’s fitness for its new listed status.

In addition, post listing, directors are responsible for ensuring controls are monitored and adapted, if necessary, on an ongoing basis, in line with any changes within the business. The FPPP Memorandum is, therefore, a live document. Company directors should plan regular assessments of the Memorandum, such as a complete annual review before the annual audit, alongside brief quarterly reviews.