Last week, the Public Company Accounting Oversight Board (PCAOB) released its semi-annual white paper providing general information about certain characteristics of emerging growth companies (EGCs). The PCAOB’s white paper provides a number of observations regarding EGCs, which we summarize in a just-released Flash Report published on Protiviti’s website. In our Flash Report, we also review the implications for EGCs that report material weaknesses in their internal control over financial reporting and offer guidance to affected organizations to help them avoid or overcome such findings.
At Protiviti, we routinely counsel private companies that a good governance and control structure is a sound business strategy for any company, and particularly for fast-growth companies with outside investors. If you don’t believe us, just ask the Securities and Exchange Commission (SEC).
Recently, SEC chair Mary Jo White gave a speech at Stanford University, directly addressing private companies. “Being a private company comes with serious obligations to investors and the markets,” White said. “For the new and evolving markets to be successful, all investors need confidence that they are being treated fairly and that the full range of risks are transparently disclosed.”
She went on to say, “Some of the principles that characterize public companies – transparency with investors, controls on financial reporting, strong corporate governance – have applicability and relevance to private companies, especially those pre-IPO companies that aspire to go public, and should not be overlooked or avoided, whether or not mandated by federal law or a SEC regulation.”
So, what are those pre-IPO “musts” that private companies should do now to create good governance and control structure? It comes down to two key pieces of advice:
- Start early. Understanding the timeline of events and transformation in an IPO process is key. We recommend certain tasks be done prior to an IPO. Such tasks include evaluating the internal control and governance environments and identifying areas of risk as well as areas for improvement.
- Know the potential issues before they arise. There are a number of issues that companies typically face during the first year of being public. If you plan properly, you can address most of these issues prior to the IPO, and then identify and address the rest as they evolve. Examples include lack of internal buy-in or understanding of the importance of proper controls, minimally documented policies and procedures, and internal control gaps.
Finally, I blogged not long ago about our latest Guide to Public Company Transformation. It contains a wealth of information, in a helpful Q&A format. It’s a good way to take care of the second point I make here – knowing the issues. The early start, that’s up to you.
By Steve Hobbs
Managing Director, Public Company Transformation
If you’re preparing to take your company public, you surely know you have a lot of new reporting and legal requirements to meet, and that your organization will require a number of changes. You may also know that you will need help in this process, or at least some good guidance.
The latest edition of Protiviti’s Guide to Public Company Transformation: Frequently Asked Questions, released last month, offers just such guidance. It’s a comprehensive and helpfully organized 55-page reference that organizations can use to find an answer to just about every question during the exhilarating and exhausting time surrounding an initial public offering (IPO) – from when is the best time to go public to how to make sure transformation efforts, including Sarbanes-Oxley (SOX) compliance, are maintained in the post-IPO period.
An IPO frequently requires a complete company transformation. Newly public companies may need to upgrade their financial reporting processes, information technology (IT) environments, as well as their governance, risk and compliance (GRC) capabilities. They will need to meet and maintain compliance with SOX and other financial reporting requirements, none of which are easy or straightforward.
While ringing the bell is perhaps the most exciting moment in an IPO journey, the actual transformation work behind the scenes is just beginning. Once listed on the exchange, the company needs to continue to evolve its functions, transforming itself into a business that meets and reports on an entirely different set of public and regulatory expectations. It’s a lengthy, complicated process, and mistakes can be time-consuming and costly.
To lessen the burden and increase the chance of success during this transformation, the new edition of the guide places a greater focus on the post-IPO period – in other words, we look beyond the IPO itself to ensure that companies know what’s needed to become – and stay – scalable and fully compliant in the future. This change in focus is reflected throughout the guide, as well as in the guide’s title − we’ve replaced the word “readiness” with “transformation” to indicate what an IPO truly is.
Other new or updated areas in the third edition of the FAQ guide include:
- A section on developing an executable strategy and action plan prioritization map; this replaces prioritization maps used in previous editions.
- Updated information on current laws, including the Jumpstart Our Business Startups (JOBS) Act and the Fixing America’s Surface Transportation (FAST) Act.
- Updates about revenue recognition, including updated accounting standards from the Financial Accounting Standards Board (FASB). That includes a specific update, Revenue from Contracts with Customers, and the FASB’s recently issued new standard on accounting for leases.
- A discussion about accurate forecasting and budgeting.
- Updates on IT policy and process-related evaluations and activities.
- A discussion about data security and privacy strategies and policies.
- An update on the costs of becoming a public company, and an overview of the largest cost components.
Last but not least, it’s been our goal to make this guide as user-friendly as possible so that executives and managers can continue to consult it at every step of the process – let us know what you think in the comments.
And we will continue this conversation on April 26, in a webinar on the challenges faced by growing companies. You can register here.
Good news for small companies considering an IPO. On December 4, 2015, President Obama signed the Fixing America’s Surface Transportation Act (the FAST Act). Aside from directing transportation spending, this act includes provisions relevant to startup companies and companies seeking to pursue the IPO path. Below, I’ve outlined the major ways in which this act affects so-called “emerging growth companies,” or EGCs – defined as companies with revenues of less than $1 billion in their most recent fiscal year – by potentially reducing the costs related to initial filings and allowing them to keep their information confidential longer.
- Longer confidentiality period. Under the JOBS Act, which created the EGC category, a company that meets that definition needs to publicly file a registration statement for its IPO no fewer than 21 days before the start of its roadshow. Under the FAST Act, this time period has been reduced to 15 calendar days.
- Maintaining EGC status longer. In some cases, companies that have started the IPO process as EGCs have lost that status – for example, if the SEC review process continued past the end of the fiscal year in which the issuer crossed over the $1 billion revenue threshold. Under the FAST Act, such a company would remain an EGC through the earlier of either its IPO date or the 1-year anniversary of it otherwise losing EGC status. By retaining this status, the company is entitled to reduced regulatory and reporting requirements under the Securities Act and the Exchange Act.
- Reduced disclosure requirements. The FAST Act permits EGCs to omit historical financial information from their initial confidential submission or public filing of the IPO registration statement if this historical financial information would not be required in a registration statement (S-1 or F-1) at the time of the road show.For example, EGCs are currently required to include 2 years of audited financial statements in their public IPO filings. For some issuers, the timing of the IPO process may be such that the fiscal year would complete while the review process is still going on, and therefore the company would need to add audited financial statements for that most recent year. Under the FAST act, in a situation like that, financial statements for the earlier year would not be required in the registration statement. Instead of going through the expense and effort to audit and include financial statements from that prior year, the issuer could simply omit that year from the initial and subsequent filings.
These provisions do not free small companies of the onerous task of preparing and filing their IPO-related financial statements but they do provide some relief, including a longer confidentiality period.