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Accounting Series - Online

21 Jan Accounting for Accounting Costs in the Pre-Incorporation Phase of a Public Offering

Prepping your company for a public offering can range in cost from firm to firm. In fact, much of the cost of going public is couched in both legal and accounting professional fees. Such fees can vary widely and depend both on the quality of the firm as well as the name attached to the firm. The wide discrepancy in both cost and quality of service has been a source of opportunity for qualified PCAOB accountants with Sarbanes-Oxley expertise and experience.

Keeping Costs Low

Our mantra for public offerings is and has always been save money where money saving is important. In our attempt to take clients public without going broke, we look to source reputable, quality firms with good reputations that can perform quality work.

At the end of the day, professional services fees are a commodity. And, if said commodity can be completed above the quality threshold needed to be “good enough” than the only comparison at that point is the cost of doing business with said firms. We were recently working with a private client who had decent books, not audited, but financials whose quality was on par with what one might expect from a mid-market company. The accounting firm didn’t have any special qualifications. The company itself was doing about $2MM in EBITDA, but they were paying out the nose for their annual accounting costs–something to the tune of $80K+ per year. If a public company does it right, they shouldn’t have to even pay that much. The accounting firm that had that business was certainly making their money’s worth over the course of several years having our firm as a client.

The moral of the story: do what you can to keep the cost of your accounting low. Yes, you need quality, expert work, but it doesn’t have to be the expense of your right arm and left leg. We could rightly deem this as “accounting for accounting.”

The Audit

When you’re eventually ready to take your company public, there will–of necessity–be a two-part audit performed on the company by two separate CPA firms. The first part of the audit will be the creation of your financials, complete with all relevant footnotes. The SEC requires much more than just a simple export from Quickbooks. You’ll need detailed information included in the footnotes explaining some of the finer points of your financials, including any potential discrepancies. The financials will need to be compliant with GAAP and performed by a PCAOB compliant CPA firm.

Second, your company will need the full-blown audit performed where a similar CPA firm provides a review of the previously drafted financials. Such firms are there are a fail-safe check to ensure all financial data represents an accurate reflection of your company’s financial performance. Both firms are there to ensure your company meets the stringent rules laid out by the Sarbanes-Oxley Act. Each firm includes requisite insurance against any liability issues that may arise as a result of the audit process. In vetting audit firms and costs, it is important to note that many auditing CPA firms will also be vetting you. Because their reputation and livelihood is on the line, they’ll like to ensure that your company is what it says it is and that there are no skeletons in your financial closet and no nefarious players on your executive team or board of directors. More than once we’ve seen auditors refuse to work with particular executives and teams. This is especially true for foreign reverse merger deals where greater instances of fraud and corruption have been evident in recent years.

Market Makers

It is this man’s opinion that much of the true cost of a public offering should be spent on the market makers–those that are hired to promote and create a market for the company’s stock. That’s typically what sets an IPO apart from other alternative public offerings.  That’s the main reason IPOs typically include much higher costs than the cheaper APO.  That’s why it’s almost always misconstrued that traditional IPOs are more expensive “just because.” They’re more expensive because it costs money to create a market with ample public float for a company’s stock.

If you think accounting should be dirt cheap, you’re wrong. The experts deserve to get paid a good wage for their craft, but finding a quality solution that is reasonably priced is the goal. Your job is to make sure your company is as ready as it can be for the process.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.