Even if companies follow best practices and begin preparing two years ahead of an IPO, funds are rarely available for mounting the best accounting approach to Sarbanes-Oxley and S-1 needs. The assets simply are needed elsewhere at that moment. And quick developing merger and acquisition opportunities can put an even greater burden on financial management staffs.
In the real world, CFOs frequently find themselves staring at a short runway (often about six months) to prepare. That puts a premium on being able to identify and deal with the three key areas (systems, processes and people) quickly and efficiently.
Any review starts with corporate governance. Understand what’s required. Look at your board. Is the required financial expert on board?
Evaluate your people. Do you have the skills necessary? Think about where it might be wise to bring in outside experts to handle technical tasks, particularly those that are one-time in nature. And if you have been the technical accounting expert, don’t kid yourself that you can be the CFO, too. CFOs quickly get involved in so many issues, particularly around investor relations, that they can’t play a significant hands-on role. Seek skilled help early in the process.
Look at your systems. Are they scalable to an appropriate level? Consider risk management issues. And optimize processes through technology. Consider what you need to do to file quarterly reports. That’s going to mean getting out of Excel and automating accounting processes through an enterprise-level solution that’s scalable to an appropriate level for your firm.
Understand the "real" requirements. While filing an S-1 is a single event in your company’s history, it is the culmination of a lot of work. You’ll need at least two years of audited financial statements. Bankers and investors are increasingly asking for three years. Updating valuation and equity compensation require time to reconcile. It’s a subjective area that needs special care. Use outside experts.
Writing the management disclosure and analysis section also requires a new skill and some practice. The SEC wants a clear explanation – in common English – of what the results are and why. It’s for the investors and gets a lot of SEC scrutiny. And, beware: The SEC will flag difference between the analysis section and your speeches and press releases.
The fun begins AFTER you clear the S-1 hurdle.
Now you’re on the fast track to filing quarterly financial data. Those require clean cutoffs. And that means going back and rolling those annual audited adjustments into the appropriate quarters. That can be a lot of work. Learning to do earnings per share calculations often means calling in outside help.
And then there’s tagging all your reports for XBRL (xtensible business reporting language), which is a uniform language for computers to read financial data. The SEC has set up a system of labels and all numbers require proper tagging. Software has made it easier but it’s still time consuming.
What happens if you don’t get it right? A missed filing deadline raises investor concerns and gets you increased market exchange scrutiny. It can trigger debt covenants and lead to foreclosure and de-listing (it's drastic, but it can happen). But even if you get the paperwork filed on time, other issues loom.
About 1,800 firms have gone public since 2004. One in every three has had to file a restatement. Half of those were problems with expenses (e.g., stock comp, depreciation, revenue estimates). Another 23% involved financing arrangements and 11% involved income tax issue. A restatement typically hurts stock prices for three years.
So get it all right the first time, and focus on the essentials during your (likely) 6-month time frame...using anything and everything in your MacGyver tool kit.
I recently reviewed all of the above, and more, with Consulting Partner John Dunican in a webinar. View the presentation slides or listen to the entire webinar here.