This article is the fourth in a series of pieces centered around what is and isn’t necessary for a company’s accounting (and finance) based on its stage. I see few companies get the necessary finance and accounting help they need and end up overpaying for inadequate support.
For this article, I will be focused on a company that is or is about to go public. While there are many different ways to go public, S-1, Reg A+ and SPAC to name a few, and each method has its intricacies, the end result is a public company. Since the reporting and disclosure requirements for public companies are in flux (e.g., new ESG rules), the article will address the most common issues as opposed to the intricacies of each method.
Public companies have similar internal reporting and analytics needs as late-stage private companies, but their accounting operational needs are drastically different and more complex. Therefore, the supporting organization needs are different.
Unlike private companies, audited financials, controls, governance and timely financial reporting are legally required. The audience for your financials is now not only investors but regulatory agencies like the SEC.
The analysis and rigor around your budgets and forecasts and the ability to explain your financial performance will also increase by an order of magnitude. Instead of just dealing with a few influential investors, you may now have a multitude of investors of all shapes and sizes, as well as analysts studying your financial and stock performance in detail.
Not only will you need robust processes and data infrastructure, but you also need a team who can navigate the various reporting needs of multiple constituencies: internal management, external investors and regulatory bodies.
The accounting practices and operations now have regulatory implications. Besides being GAAP (generally accepted accounting principles) compliant, you also need to be able to produce the requisite public filings required by the exchange you are listed on and the SEC. This requires an entirely different skill set, focus and infrastructure than a private company.
GAAP compliance is now mandatory. Not only that, there is typically a requirement of two to three years of audited financial statements before you can go public. You can refer to my previous article in this series on what it means to be GAAP compliant.
If you are going public, it is assumed you have a good handle on your basic accounting operation and that you are GAAP compliant. So, you should have revenue recognition, expense matching, capitalization and depreciation schedules, and equity capitalization tables well in hand. However, your public company has a slew of other requirements based on your market capitalization, which exchange you trade on and a host of other factors. Instead of breaking down the minutia for each scenario, below are the standard items you should have a handle on:
It will be very difficult to run your finance and accounting operation without the supporting technology and processes. A robust general ledger, capital table software and processes to produce the internal reporting along with the SEC-required reporting are essential. Manual processes will make audits and SEC reporting longer and more work intensive, as well as impede your data analysis.
The key difference between the analytics required of a private company and a public one is that public companies have to regularly report their earnings and financials to their investors. For larger companies, you may even have analysts tracking your company and asking you piercing and insightful questions. It is common to have quarterly investor calls, where the CEO and CFO discuss the previous quarter’s results and future plans. Unlike private companies, investors know exactly what their investment is worth since their shares are publicly traded. This adds an additional layer of scrutiny to all financial and operational performance. Being able to answer questions on the fly, and not just keeping to script, requires significant planning and a robust, prepared team under the CFO.
A controller and full stack accounting team is typically mandatory as well as a financial planning and analysis team who has a good sense of how to enable data-driven decisions. Furthermore, you’ll need an SEC reporting team to manage your public filing needs. Depending on your size and investor base, you may also need a head of investor relations. Leading the team is the head of finance, normally a CFO. The skill set of the team will shift from being intelligent and accountable to the CEO and board to one that has multiple audiences: internal leadership, an expanded and possibly active investor base, and various regulatory agencies, each with their own rules, needs and agendas.
