Unlike private companies that may or may not need an annual audit of their financial statements for compliance or stakeholder purposes, all public companies do – and not just any audit. It must be one conducted under the specific rules and regulations of the Public Company Accounting Oversight Board (PCAOB).
Many companies looking to go public have never been audited before. And if they were, the audit probably adhered to Generally Accepted Auditing Standards (GAAS), which are not accepted by the SEC. The differences between PCAOB and GAAS audits mainly lie in the auditor independence standards, level of regulatory scrutiny, and scope of details that the auditor opinion must address. An objective engagement quality review partner, separate from the engagement team, must also review and sign off on PCAOB audit results.
While CPA firms that audit private companies face periodic peer reviews, PCAOB-registered auditors face more heightened and frequent scrutiny. A PCAOB inspection is a rigorous inspection and public reporting of the audit results.
A PCAOB audit is required before a company can file with the SEC. If a private company has never been audited before, it will need to provide PCAOB audits of at least the past two years. For example, to issue an IPO in 2023, your company would need to submit 2021 and 2022 financial statements plus unaudited interim financial statements for the period ending March 31, June 30 or September 30. This additional work should be factored into the audit engagement timing, relative to the target IPO timeline.
An audit can take anywhere from six weeks to several months depending on level of complexity and preparedness, but a company looking to go public should start the process much sooner. Leave enough time to get your company audit-ready with the help of a qualified CPA and public company reporting consultant. They can help plan and compile all necessary data and documentation for a seamless audit experience.
A private company should ensure it has an adequate level of internal resources to support the PCAOB audit process, which requires demanding engagement from accounting staff. This internal support will need to be maintained to meet the heavy reporting burden that comes with being a public company.
Certain financial data that is not required in private company audits will need to be compiled, including source documentation, evaluation of complex accounting transactions and technical accounting memorandums. One example is a capitalization (cap) table, a complex spreadsheet detailing all equity transactions, ownership stakes, types of shares and option pools.
The CPA will lead the audit process and serve as part of a larger team of advisors, including an investment banker and attorney, who will help your company manage and meet the many requirements of the SEC filing, IPO process and exchange listing.
Aspiring to go public is not the only reason a private company would want to pursue a PCAOB audit. Another motivating factor could be to make the company more attractive to potential public company buyers. Whatever the reason, it will be a big adjustment for the company’s accounting staff, particularly if the company has not been audited in the past. Reach out early and often to a PCAOB-registered audit firm that can guide you through the audit process and work collaboratively with your advisory team.
This article originally appeared in the 10/16 issue of Crain’s New York Business.