The Lowdown on Carve-Out Financial Statements
IPO Readiness: Accounting Challenges You May Face When Going Public
As you might've heard, there's no money tree sitting in the shared courtyard of your company's office space. Yes, it would be nice if capital were that easy to come by but, unfortunately, such is life. However, thanks to investors, M&A, and public offerings, organizations don't have to rely on a mythical monetary shrub to find the capital they need to expand their operations and grow market share.
That's not to say that the road to new sources of capital isn't without its own potholes, of course, as demonstrated by the many potential hazards in an IPO. For that reason, Embark wants to hone in on some of the more common accounting issues that can arise while going public to prepare you for the journey and make it as smooth and stress-free as possible. Follow our insights and vast experience and, lo and behold, your chances for a successful IPO without any accounting grenades blowing up will drastically increase.
One of the most drastic changes to your accounting processes and procedures when going public is in your financial reporting. First and foremost, your reporting cadence will change, moving from annual financial statement preparation to quarterly financials. Likewise, your statements also become more granular in nature, now needing to adhere to GAAP standards as well as the SEC.
From the very moment your team decides to go public, start putting a reliable, scalable, and highly functional framework in place to help your accounting navigate these new stricter reporting requirements. One of our favorite solutions here at Embark, a company we've mentioned in the past, is Workiva and their comprehensive, collaborative WDesk suite. WDesk is especially useful for your SEC filings, helping you efficiently compile and format your reports to ensure compliance with the regulation overlords. This would obviously include all of your necessary disclosures as well.
Granted, WDesk is just our preferred reporting solution, so we suggest doing your own due diligence to find a reporting platform that suits your particular needs best. Whatever you choose, though, make sure it checks all of your boxes and streamlines your compliance and reporting needs. And that brings us to our next potential accounting challenge when going public -- audits.
Expect significant changes on the auditing front as you go public. You're moving from AICPA audits to the more rigorous PCAOB, a topic we've previously discussed in depth. Aside from the fundamental differences between the two, additional insights and data will become a requirement for your disclosures, and that data doesn't just fall out of the sky and into your lap.
Also, because a PCAOB audit is more involved than its AICPA counterpart, your audits as a public entity will undoubtedly require more time, resources, and staffing than before. You’ll have to produce comparative historical financial information for the quarters as well as annual financials when you issue them. Therefore, you need to go back to prior periods and ensure they have the relevant information and financials, a daunting task to say the least when you’re going through three years of data and reports.
Ramping up both your staff and systems sooner rather than later for these heightened audit requirements can help eliminate last-minute panic attacks and a general sense of chaos that never lends itself well to a successful audit. Naturally, that higher audit bar also means a more intense spotlight on your internal controls, a topic so essential to your accounting when going public, it deserves its very own section.
As a public entity, you'll need an opinion on your internal control framework, a notion that you're most likely unfamiliar with. Sure, sound internal controls are absolutely a best practice for private companies, but now they'll be a necessity. Your CEO and CFO will have to assert on the effectiveness of your controls and that they're operating properly.
What exactly does that mean, you ask? You must establish control narratives, defining and writing them out after a comprehensive development and testing process. Just like your new reporting standards, this takes time and effort, definitely not something that will quickly fall into place. While you can establish a new control environment in six or nine months, it's best to assume the ramp-up will take a year or so. Therefore, start the process early and integrate it into your pre-IPO timeline to make certain you're as organized as possible.
There's nothing static about accounting standards, but you already knew that. Recent changes to rev rec, lease accounting, and other topics have put greater scrutiny on the technical aspect of accounting for public firms. The SEC wants what it wants and when it wants it, particularly when it comes to new rules requiring a degree of subjectivity.
It's in your best interest as a soon-to-be public entity to devote sufficient time, effort, and resources to your technical accounting to minimize the chances for a particularly intense comment period or even restatement. Remember, in your first few years as a public company, developing a sense of trust between your organization and the public is essential, and an early restatement doesn't exactly help your cause.
Remember the ramping up we discussed? That includes your accounting staff, all of whom already have a full plate of daily responsibilities. Add in the new accounting requirements for a public firm and you have a recipe for attrition unless you make the necessary proactive adjustments ahead of time. You need adequate staff as well as those with specific knowledge and skills to lead the way in your company's new public life.
Many different departments comprise your organization. Forming a steering committee early in the process helps create a unified, succinct narrative behind your vision that incorporates accounting, finance, legal, HR, and your operations themselves. Identify critical metrics to follow and tell a story that appeals to the market but is also unflinchingly accurate and representative of your company. A well-rehearsed, cohesive steering committee will be incredibly important during your roadshow later in the IPO process.
So those are the bigger, more obvious items to keep in mind as you go public. However, like it or not, there's a whole lot more that your accounting team must keep in mind, sometimes specific to your company. If your internal controls are a barren wasteland, for instance, you'll have to devote more attention to them than a company that already had a head start on that front. In other words, things can and will come up, meaning it's imperative to have genuine expertise in your corner.
Needless to say, that's where Embark can provide so much value as you move closer to your IPO date. Our consultants have seen it all, done it all, and can leverage our insights and experience for your benefit. Going public doesn't have to induce upset stomachs and migraines for you and your accounting staff. Let Embark turn that frown upside down and make your journey to a public entity memorable and exciting, the cause for hope that it should be.