5 Ways to Prepare for an Audit Before Taking Your Company Public

Posted by Joseph Himy

2019 has been a big year for companies going public, and it’s not over yet. Uber, Lyft, Slack, and Fiverr International all launched IPOs this year, and that’s just the tip of the iceberg.

Benefits of Going Public

Taking your company public is probably the most exciting, significant event a business owner can experience – but it’s also a complicated process. Benefits of going public include increasing the capital coming in, creating an exit strategy for investors, and having the ability to merge with or acquire similar companies. Moreover, it means you really made it.

But what does going public actually mean? Going public, or an initial public offering (IPO), is when a business owner transfers ownership to a large group of individuals, usually an investment bank. The bank uses a team of underwriters to create a plan for selling stock shares, which are then sold on the stock market.

Part of the underwriting process includes an audit, which is necessary to make sure that your company’s finances are in order. The audit is done by an external auditor to make sure that the review of your company is completely unbiased.

If you want to take your company public but first need to make it through the audit, here are 5 ways to prepare.

  1. Get organized. An external auditor will need to review your company’s financial records, statements, and transactions for at least the past three years, so your documents need to be organized and easy to find. If organization isn’t your strong suit and you have documents floating around, it’s worth hiring someone to get things in shape.
  2. Document your accounting policy choices, especially if they aren’t the norm. The auditor will not only look over your finances but will also look at how you handle them and make decisions.
  3. Do your tax homework. Public companies have different tax and valuation issues than privately-owned companies, and you need to be aware of them. To properly prepare, you can hire an IPO-experienced tax adviser such as one from the CFO Squad who can implement systems for automatically reconciling the company’s financial future with the relevant tax provisions for IPOs. Tax risks will also need to be assessed, and it’s a good idea to do this before an audit.
  4. Review your management structure (and change if necessary). For a company to go public, it needs to comply with the Sarbanes-Oxley Act of 2002 (SOX) and maintain certain standards in the management of the corporation. These include an external board of directors, internal controls over financial management, and the ability for employees to contact the audit committee if necessary. While complying with SOX, you’ll also want a management structure that’s scalable, so that (hopefully) when your company grows, you don’t need to reconstruct the entire system.
  5. Start early. External auditors need to meet a higher standard of independence when dealing with an IPO, and in some cases, their independence needs to be reassessed. This can take anywhere from a few weeks to a few months, so it can slow down the process significantly. Start early, and that way you can be on time for your target IPO window.

What Comes After the Audit?

Once you’ve gotten through the audit, the next step is to integrate the information with your registration statement and file with the SEC. After that, the SEC will review your statement and send it back with comments, which you can address. The back-and-forth between your company and the SEC will continue until the SEC is satisfied.

Don’t Be Discouraged

In total, it usually takes an average company between six and nine months to launch an IPO – not too bad considering the scope of the transformation that it entails. But if you’re daunted by the process and the time it takes, just think of all the companies that went public this year.  Extremely successful companies, many of them unicorns (valued at over $1 billion). So even though the audit can be painfully thorough and the entire process daunting, the payoff is certainly worth it.

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