In a recent live session with Auxilius and Crowe LLP, speakers shared timely insights on navigating the evolving regulatory landscape and mitigating financial risks inherent of clinical trial financial reporting. This session, geared toward clinical-stage biopharma companies, focused on audit readiness, internal control challenges and how automation can enhance compliance and reporting.
Below are some key takeaways from the session, and a link to the full recording.
1. The Evolving Regulatory Landscape: Increased Focus on Transparency
Ryan McNally, Senior Manager at Crowe, highlighted two major FASB updates affecting life sciences finance teams:
1. Segment Reporting (ASU 2023-07): Public companies must now disclose significant expenses (e.g., R&D) at the segment level if they’re reported to the Chief Operating Decision Maker (CODM).
- Effective for annual periods after December 2023 and interim periods thereafter.
- Requires detailed disclosure of significant expenses by reportable segments, especially if those are provided to the Chief Operating Decision Maker (CODM).
- Disclosure of the CODM’s identity and position is now mandatory.
- Prior periods may need restatement to align with new segment classifications.
2. Disaggregation of Income Statement Expenses (DISE - ASU 2024-003): Effective 2026, companies must break down income statement line items like SG&A into detailed categories in footnotes—though some clinical trial accruals may be excluded if uncertain or estimated
- Requires footnote-level breakdown of key income statement captions (e.g., SG&A, cost of goods sold) into categories like employee compensation, depreciation, and inventory purchases
- Clinical trial accruals may be excluded from disaggregation if the expenses meet certain future obligation and uncertainty criteria.
- These changes reflect a broader regulatory trend toward greater granularity and transparency in financial reporting, particularly around R&D activities.
Implication:
Companies must ensure they have efficient systems and processes to collect and categorize data accurately and quickly.
2. SEC Comments on Clinical Trial Accruals and Critical Audit Matters
The SEC continues to issue comment letters targeting R&D disclosures, with life sciences being a focal point. Common feedback includes:
- Requests to disaggregate R&D expenses by product or program.Inquiries into how R&D costs are managed and reported internally.
- Inquiries into how R&D costs are managed and reported internally.
And, clinical trial accruals continue to be a critical audit matter, demanding heightened accuracy and documentation:
- CAM designation is driven by clinical trial accruals being materials, complex, and judgement-dependent.
- Auditors are increasingly scrutinizing how R&D expenses, especially those tied to trials, are accrued and reported.
- Companies must prepare to justify their methodologies, assumptions, and estimates.
- Missteps here can lead to material weaknesses and increased audit risk.
- Heavy use of estimates, third-party data, and manual tracking (often in Excel) raises audit level of effort and risks.
Implication:
The SEC is not just asking what the numbers are—but also how they’re tracked and reported. Manual processes or vague disclosures are no longer sufficient. CAM designation means more audit scrutiny, more questions, and more pressure on accounting teams to substantiate assumptions and calculations. Audit-readiness is paramount.
3. Common Pitfalls in Internal Controls for Clinical Accruals
There are frequent internal control challenges in the clinical trial finance process, such as:
- Manual processes and spreadsheets often lack the rigor and traceability needed for compliance.
- Data gaps between finance, clinical, and third-party vendors can lead to incomplete or inaccurate accruals.
- Audit-readiness is frequently compromised by poor documentation and lack of real-time visibility into spending.
Examples of Common Pitfalls in Clinical Trial Accruals:
- Double Accrual Risks: Happens when multiple teams accrue for the same expense (e.g. CRO-provided estimates and late AP invoices)
- Incorrect Classification (Accrual vs. Prepaid): Due to spreadsheet integrity issues or missing contract changes
Implication:
Strong cross-team communication and review of thresholds (e.g.,extra validation for invoices >$50K after AP close) plus better tracking and validation when change orders impact life-to-date expense estimates.
4. Strategies for ICFR and Risk Mitigation
Internal controls must rise to the challenge. Auditors are increasingly testing
- The design and operating effectiveness of internal controls over accrual
- The completeness and accuracy of supporting data (e.g., contracts, invoices, SOWs)
- The validity of assumptions behind estimates, often requiring collaboration with clinical operation
To strengthen financial reporting and internal control environments, consider
- Establishing clear governance structures around clinical trial finance
- Improving coordination across departments involved in trial management and spend tracking
- Standardizing processes for accrual estimation, review, and documentation
Recommended Internal Controls
1. Budget Setup & Change Order Review
- Controls around setting up initial budgets and updating for amendments
- Example: Regular outreach to legal/contracts teams to identify new contracts or amendment
2. CRO Estimate Review by Knowledgeable Staff
- Estimates should be reviewed by someone close to the trial, not just accounting, for better accuracy
3. Fluctuation & Reasonableness Analysis
- Compare actuals to budget or past periods to catch anomalies
- Example: One client flagged studies with accruals >20% of life-to-date cost for a deeper review
4. Documentation
- Auditors love SOPs and documented methodologies (e.g., accrual methodology, delegation of authority).
5. Spreadsheet Controls
- Built-in checks, reconciliations, and traceability to ensure data integrity.
6. IT Controls for Tools like Auxilius
- Apply same governance as ERP systems (logical access, SOC reports, change management)
- SOC 1 Type II report is especially valued for audit compliance.
Implication:
Without automated tools and robust internal controls, manual methods (like Excel) can hinder audit readiness and elevate risk.
5. Technology as a Key Enabler of Audit Readiness
Auxilius is designed to centralize and automate accrual management—reducing audit risk, improving accuracy, and increasing transparency. As auditors expect more, Auxilius helps companies scale processes, minimize manual work, and maintain compliance.
Erin Warner Guill, President and COO of Auxilius, showcased how technology can transform risk management:
- Automated platforms can streamline accruals, track clinical spend, and support real-time reporting
- Built-in controls and audit trails help ensure compliance and reduce manual error.
- Auxilius is designed specifically to handle the unique complexities of clinical trial accounting, supporting both financial accuracy and audit preparedness.
Crowe shared the pros and considerations of using technology (e.g.,Auxilius):
Pros:
- Improved audit confidence & reduced manual errors
- Faster, more accurate reporting
- Greater visibility into data and insights
Considerations
- Systems require robust IT controls so that auditors can rely on the data
- Public companies need SOX compliance in place (e.g., access controls, vendor SOC reports)
- Custom workflows/reports must be validated regularly
Implication:
Without automated tools and robust internal controls, manual methods (like Excel) can hinder audit readiness and elevate risk.
Final Thought:
As clinical trials grow in scale and complexity, life sciences companies face mounting pressure to modernize their financial operations. Between new reporting requirements and auditor expectations, the stakes are higher than ever. Leveraging purpose-built technology and strengthening internal controls are not just best practices—they’re becoming necessities to ensure efficiency and compliance.
To learn more about how Auxilius supports audit readiness and clinical trial finance automation, visit www.auxilius.co
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