The boom in the IPO and SPAC markets has led many inventors and smaller companies to ask: How can we cash in? Small companies have access to US markets too and have certain exceptions which apply. While these exceptions are useful, they do not absolve smaller companies from the major principles of Sarbanes-Oxley. A small reporting company, according to the SEC, is any company which has:
a public float of less than $250 million, or
annual revenues of $100 million and a public float of zero or less than $700 million.
These companies are granted exceptions to some of the reporting rules which apply to larger companies. In this blog post, we’ll discuss what those differences are and how you need to be ready for them.
Before IPO: 2 years of good audit
Accelerated filers and large accelerated filers must prepare three years of audited accounts as part of their IPO filing. For smaller companies, known as non-accelerated filers, that requirement is reduced to two years. The audit will review your financial statements for the years prior: your income, expenditure, and balance sheet.
Public company audits are standardized and the rules governing them are stricter. Since private are not subject to PCAOB rules. The most common example is auditor independence. Private auditors can assist companies prepare evidence for their accounts and support them in weaker audit areas. If there was missing evidence or an account was presented incorrectly, they were able to calculate the correct balance, adjust your accounts, and provide the evidence.
For pre-IPO audits and those afterwards, the PCAOB requires that the auditor stays independent. No longer can accounts be changed afterwards because the auditor no longer can be your accountant. The company takes full responsibility for its accounts. Any mistakes found in the company accounts must be updated before the accounts are published; otherwise, the auditor will assert a qualified opinion. This could reduce your stock price or cause the exchange to delist shares.
There are two ways in which the auditor will confirm your accounts are properly evidenced:
They will conduct a controls-based audit. Your auditor will need to review your full company operations. That includes how customers contracted, invoiced, and reported. It also includes reviewing your expenditure processes and recognition. If the auditors are confident that your processes are well-controlled, they will rely on your process to evidence the accounts.
They will conduct a sample-based audit. If your processes are not controlled, they will start to sample transactions. They will look at your account balances and decide how many samples they need to see to confirm that the balance is presented correctly. Depending on your business, this could be hundreds of samples per account. These audits usually take longer and are more resource intensive for your business.
If the company's processes are not up to the control-based audit standards and the auditors decide their higher control risk, then your company will need to find the resource to satisfy their audit testing.
Risk and Control: You have none?
In 2020, the SEC came out with another easing of rules for smaller companies. Beginning in early 2020, smaller companies no longer needed to have their risk and control matrix audited separately. This was great news as it reduced the fees for internal control-based audits.
But that does not mean that small companies are completely exempt from internal controls. The SEC rules still require that small companies' financial statements be still supported by internal controls, and management will need to implement a risk and controls matrix for the accounts. The auditor will not be able to supply an opinion if the company does not have one!
How can small companies reduce resources?
The right planning will reduce expenditure and increase the return on going public for smaller companies. IPO for smaller companies will raise less money than larger ones, so the costs of staying public need to stay low. Hiring an IPO Readiness advisor, such as Advancing to IPO will keep your costs down and your compliance up. Contact us today for a free consultation.