For most startups, conversations in the boardroom focus on product milestones, burn rate, fundraising, and market traction. Yet one of the most powerful — but often overlooked — levers of long-term value creation is strong internal control oversight.
As startups scale, the absence of foundational governance structures can expose the business to fraud, regulatory penalties, data breaches, and reputational damage. This is where board governance becomes critical — not just for compliance, but for resilience.
1. The Board’s Role in Control Maturity
Many startup boards assume internal controls are purely a management responsibility. But tone at the top starts with the board, and research shows that board oversight is strongly correlated with financial accuracy and ethical conduct.
Key responsibilities of the board (and audit committee, where one exists) include:
- Reviewing internal control policies
- Monitoring risk exposure
- Overseeing financial reporting accuracy
- Challenging management assumptions
- Ensuring compliance with applicable laws and industry standards
As startups mature, especially those seeking to go public or engage institutional investors, investors increasingly expect boards to implement proactive risk oversight — not wait until something goes wrong.
2. Why It Matters for Startups
According to a 2022 McKinsey & Company report, more than 30% of late-stage startups experience internal control failures related to:
- Misstated revenue recognition
- Unapproved executive compensation
- Vendor payment fraud
- Improper equity allocation
Another study by KPMG Private Enterprise found that companies with active audit committees are 23% less likely to experience material financial reporting issues.
Even at Series A and B stages, introducing board-level oversight for internal controls can:
- Increase investor confidence
- Reduce the cost of capital
- Speed up audit readiness
- Improve decision-making with cleaner data
3. The Case of Theranos: What Happens When Governance Fails
Theranos is one of the most cited examples of governance breakdown at the startup level. Despite having a high-profile board filled with political leaders and military generals, the board lacked members with financial or compliance expertise.
There was no functioning audit committee. No independent verification of financial statements. No risk committee. As a result, critical failures in internal controls went unchecked — from manipulated lab data to undisclosed product limitations and a complete absence of financial transparency.
This case highlighted a hard truth: even the most visionary founders need accountable boards with diverse expertise and the courage to ask hard questions.
4. Best Practices for Board-Led Internal Control Maturity
A. Add Independent Directors with Financial Expertise
- Bring on board members with CPA, CFO, or audit backgrounds
- Look for experience with SOX compliance, enterprise risk, or IPOs
B. Establish an Audit or Risk Committee Early
- Even a lightweight committee of 2–3 board members can provide oversight of: Financial reporting Control frameworks External audit relationships
- Start with quarterly reviews of financials and internal control gaps
C. Encourage Management to Document Controls
- Boards should request clear documentation of: Spending authority limits Equity grant processes Vendor approval workflows Cloud security and data governance protocols
D. Regularly Review Risk Registers
- Collaborate with the executive team to create a risk register that captures: Financial risks Cybersecurity exposures Legal/regulatory compliance
- Revisit and update this at least twice a year
E. Push for Internal Audit Readiness by Series B/C
- Even if a full internal audit function is premature, consider: Periodic control reviews by external consultantsSOC 2 readiness assessments for SaaS companies Early-stage SOX-lite frameworks if preparing for IPO or acquisition
5. Real-World Example: Shopify’s Scalable Governance Model
While Shopify is now a multi-billion dollar public company, its early success was also shaped by sound governance. When it raised its Series B round in 2011, Shopify brought on independent board members with financial and audit backgrounds and began building the scaffolding for a public-ready control environment.
They introduced:
- Clear board charters for each committee
- External reviews of control maturity before IPO
- Robust discussions around risk tolerance and cybersecurity
This governance foresight gave investors confidence, accelerated the IPO process, and laid the groundwork for long-term trust.
6. Final Thoughts: Build Governance Like You Build Product
In the early days, it’s tempting to view governance and internal controls as bureaucracy. But just as you prototype a product to minimize customer risk, you need governance structures to minimize business risk.
As a founder or board member, don’t wait until you’re forced to act. Establish your internal control oversight framework early, and let your board be the strategic partner it’s meant to be.
Strong boards build strong companies — not just big ones.
Originally published on LinkedIn