Look at that new public company over there with its carefully chosen ticker symbol, brand-new source of capital and sense of relief among its senior leaders. They have finally achieved the milestone of going public that they worked months to reach. Take an even deeper look, however, and you’ll see that relief will be short-lived if they do not have a robust mix of talent and resources to handle the rocky transition ahead. They are setting themselves up for a stumble.
For companies that have just gone IPO, staying upright is “about efficient staffing and it’s also about the right staffing,” said Senior Consultant Diana Gilbert, who leads the Technical Accounting Group at RoseRyan.
During a recent RoseRyan-hosted seminar, co-sponsored with Fenwick & West LLP and BayBio, Gilbert laid out the big trouble spots between the first day a company’s stock gets traded and a year or two later when it can claim to be a bona fide, mature public entity. During this transitional period—a time that RoseRyan calls “Day 2”—the company has to adjust to a plethora of new rules, shrunken turnaround times and a stream of inquiries by investors and analysts who are watching every move and reading every 8-K. “You have a whole new audience you have to answer to,” Gilbert said. “You have quarterly filings. You have reporting deadlines. While 45 days to file may seem like a lot of time, when you back into it, it’s not a lot of time.”
There’s no going back now
Within that time crunch are layers of reviews that didn’t apply when the company was privately held. The audit committee, the company’s lawyers and auditors all get a say on what the finance team prepares. This will slow down the process and adds to pressure on finance to be even more buttoned up than before. The stakes are higher. “You can’t compromise the quality of what you’re doing,” Gilbert said. If you do, she noted, it could result in a restatement. As it is, about 31 percent of new public companies restated their financials between 2004 and 2012, according to Audit Analytics data. That is a woeful statistic.
To take on the higher load of compliance requirements, post-IPO companies should have access to technical accounting expertise, with people who are on top of the latest changes and leanings by standard-setters and regulators. And they need people who have actual public company experience. Most new companies do scale up in some way: Nearly 85% of CFOs surveyed by PwC said they hired one to five staffers after going IPO solely to meet the new reporting requirements. It is essential to have the right team in place.
Additional help is more than just handy to have—it can be a necessity in the eyes of the auditors. Even though companies that are considered “emerging growth companies” (those with less than $1 billion in revenue) do not need their auditors’ signoff on their internal controls over financial reporting just yet, auditors do want to know that management’s review is occurring. And they want evidence that it’s happening.
Fortunately, most companies wending their way through the early part of their post-IPO life have “relaxed” rules until they lose the ECG status, noted Dan Winnike, a partner at Fenwick & West. The longest a company can have these looser restrictions (including fewer compensation disclosures and no say-on-pay votes) is five years, but that could be shortened if it becomes a large accelerated filer or meets other criteria.
For companies going through the tough transition from getting public to being public, any break surely helps.