Companies considering a public offering in the next 18-24 months must plan for their pre-IPO audits given the possibility of this time period being included in a future SEC registration statement.
Financial statements in the public domain generate a host of considerations, which, if planned proactively, will help clear the way for an efficient IPO process. As part of the IPO readiness journey, it’s time to start planning an external audit.
Consider the Audit Scope for FY 2023
An audit under PCAOB standards comes with higher materiality thresholds than what is required for an AICPA audit. Companies in the process of preparing an SEC registration statement are subject to “uplift” procedures that reflect additional audit procedures from historical AICPA audits to comply with a PCAOB audit.
Financial controllers can alleviate some of this effort by requesting the scope of the current-year audit to be at public-company materiality levels and potentially revisiting prior periods. Although it might be time-consuming, this approach can provide efficiencies, as additional sample testing can be completed before the commencement of the registration process.
Address Material Technical Matters
Material complex General Merchant can absorb a significant amount of financial controllers’ time, and delayed accounting typically contributes to inefficiencies during the year-end audit.
To minimize undue audit issues, maintain an inventory of such transactions and proactively address them within the respective quarter or, at the latest, during the fourth quarter before year-end audit fieldwork begins. This can save significant time during the year-end audit, as the financial controller and their team can focus on “routine” year-end close and reporting with key technical matters already addressed.
Examples of common accounting issues recommended to close out before year-end include:
- Accounting for business combinations.
- Accounting for the issuance/modification of debt and equity instruments.
- Accounting for long-lived asset disposals.
- Impairment assessment of goodwill, intangibles, and long-lived assets.
- Adoption of new accounting standards.
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Consider New Contracts With Customers
Although the adoption of ASC 606 Contracts With Customers may be behind us, the application of ASC 606 continues to require considerable judgment for an array of industries.
To ensure a smooth year-end audit of reported revenue:
- Identify new material contracts with key issues, like principal/agent relationships, variable consideration, and contract modifications.
- Proactively prepare technical memos for audit review.
Private Company Alternatives
The prospective transition to public company reporting will result in the reversal of any private company accounting alternatives a company previously adopted (e.g., election to amortize goodwill). Similarly, certain practical expedients permitted for private companies, such as the use of a risk-free rate for leases, will no longer be available.
Financial controllers will want to understand the prospective impact of any such changes to their financial statements and consider whether implementing these changes in the current financial year could save time in the future and help align their reporting to public company peers.
Preparation of Shell Financial Statements
Streamline the year-end reporting process and allow auditors an early review by rolling forward prior-year financial statements and refreshing disclosures before year-end hits.
Additionally, public companies are subject to increased disclosure requirements under SEC Regulation S-X. Pre-IPO companies will need to consider this on their path toward their first registration statement filing.
Financial controllers may want to consider the timing of uplifting their disclosures in accordance with SEC requirements and whether it could be done in conjunction with the preparation of shell financial statements for the FY 2023 audit. Some examples of topics that may require new disclosures for a prospective public company include:
- Earnings per share (EPS).
- Segment reporting.
- Temporary equity classification of redeemable securities.
- Certain income-tax-related disclosures.
- Certain disclosures related to pensions and other postretirement benefits.
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Appointment of a Project Manager
As part of the IPO team, a designated project manager within the finance team who can manage the external audit ensures the financial controller has additional capacity to focus on the day-to-day management of year-end close and reporting. The project manager can help establish a predefined governance structure with the audit team, facilitate communication between the auditor and the financial controller, and support the timely resolution of audit issues. This results in a shorter audit timeline akin to a public company.
Organizations pursuing a public filing in the near term will find that the Office of the Financial Controller is pivotal to a successful IPO process. And for financial controllers seeking to deliver success to the organization, proactive planning for the FY 2023 audit is an effective way to make a meaningful impact.
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