Going the SPAC route and how it hits your accounting, Pt. 2

Last week, we discussed the reason for the sudden popularity of Special Purpose Acquisition Companies, the long runway of the standard IPO process and alluded to the challenges to consider when deciding to go the SPAC route. Let’s examine those challenges now.

The first challenge comes far before the close of a SPAC transaction. The SEC requires that the target company include historical annual financial statements for up to three prior fiscal years of its operations, as well as interim financial statements for its current fiscal period. Often, early-stage businesses don’t have their past three years of financial statements prepared in accordance with the generally accepted accounting principles in the United States known as US GAAP, which can differ significantly from cash-basis or tax-basis accounting.

Even for companies with this information available, the financial statements are required to be audited by a public accounting firm under audit standards prescribed by the Public Company Accounting Oversight Board, often known as a PCAOB audit. If your company has been previously audited under nonpublic standards, think of a PCAOB audit as a nonpublic audit on steroids; auditors are required to investigate at lower materiality thresholds, test larger sample sizes, and gain a thorough understanding of the company’s internal control framework. So, if your company has not undergone an audit before, be prepared for a difficult road ahead.

The second challenge begins as soon as a company has gone public, and sometimes before that. As noted in last week’s blog, SEC registered companies are required to have their quarterly and annual financial information subject to audit under PCAOB standards. Remember that audit of the past 2-3 years of financial statements? That was just the beginning. At this stage, companies taking the SPAC route must submit quarterly financial statements in addition to the usual day-to-day operations of its accounting. What’s more, PCAOB audits require the testing and reporting of the internal control framework around a company’s financial reporting, and any significant control deficiencies will be shared with the company’s board of directors and even to the general public. To avoid this, companies are required to quickly plan, implement, and operate a highly comprehensive plan of internal controls within a company. These internal controls are then required to be monitored and tested on a periodic basis, both by the auditors and the company itself.

Lastly, as public company internal auditors and management are required to perform their day-to-day accounting and financial reporting while also including the operation of internal controls, there will arise many significant transactions in the course of business. This could be a new debt/equity arrangement, changes to an existing arrangement, the acquisition of a new company or sale of a discontinued line of business, or even a new accounting standard required by accounting standard boards (such as the Financial Accounting Standards Board, or FASB, for US companies). All of these occurrences are related to complex accounting guidance that requires an accounting evaluation to be performed by company management. This involves the research and interpretation of dozens (even hundreds) of pages of confusing accounting guidance, and compilations of technical memos. What happens after all of this? Yep, you guessed it: the evaluation becomes subject to audit. If management missed certain parts of the evaluation resulting in a significant difference, this requires an audit adjustment and potential communication of a significant deficiency or material weakness in the company’s internal controls.

As you have likely noticed at this point, there is a significant amount of work in building a company’s accounting and financial reporting capabilities to a level that will pass muster under PCAOB audit standards (check out this blog for guidance on how to ready yourself to sell or gain funding).

If you are planning to pursue the SPAC route with your company, reaching out to an expert for assistance in complex accounting, financial reporting, and/or audit assistance might be a life-saver and can allow you to focus on the rest of the work that needs to be done.