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Taking it public: the CPA's various roles in the IPO process.

The allure of taking a company public still brings a twinkle to the eye of a corporate executive, and can include many players in the process, such as:


* CPAs who focus on financial statement compliance.

* Attorneys who ensure compliance with federal securities laws.

* Investment bankers who are the underwriters and create demand for the securities in both the institutional and retail markets.

* Financial printers who fulfill the need for both electronic filings and hard copy printing.

While the audit of the historical financial statements remains the most visible service in this process provided by an accounting firm, CPAs also play an active role in the review of filing and disclosure documents, issuance of comfort letters to underwriters, future compliance with Sarbanes-Oxley Sec. 404 requirements and other permitted services as approved by the company's audit committee.


As a general rule, going public requires audited financial statements for the past three years of the company's existence, as well as preparation of unaudited interim periods. The financial statements must meet the same level of disclosure and accuracy as is required of existing public companies under SEC rules.

In addition to the audited financial information, the accounting firm will assist the company in determining if any interim financial information is required. As a public registrant, the partner serving the engagement will be required to rotate every five years.


The SEC Division of Corporate Finance reviews all documents filed by the registrant to ensure compliance with federal securities law, appropriate accounting guidance and transparency to the reader. The SEC staff provides management with a comment letter addressing those areas which may be deficient or require additional clarity. Questions raised by the SEC staff may range from details of the offering, complexity of the capital structure, application of accounting guidance such as revenue recognition or per share data. The accountants, as well as legal counsel and underwriters, assist management in preparing the company's response to insure completeness and accuracy.


Underwriters are required to obtain a comfort letter from the accountants as part of their due diligence under the securities laws. The comfort letter confirms that unaudited financial information included in the prospectus follows U.S. generally accepted accounting principles.

The letter is typically updated in the form of a bring-down letter at the time the IPO funds are transferred from the underwriter to the company. Before performing this work, the CPA firm should sign an engagement letter with the underwriter that outlines acceptable use and scope of the comfort letter.


Prior to the creation of the PCAOB, the accounting firm might also provide additional advisory services to a company going public, including determining when in the process to bring in the underwriter and legal firm, preparing financial statements and leading the registration process with the SEC. Such services can no longer be provided under independence rules.

And since many companies do not have the necessary resources in-house to complete the information required in the prospectus, they look to a secondary accounting firm to assist them.

When a CPA firm has been engaged to provide the assurance services described above as part of an SEC engagement, that firm will be precluded from providing certain other services to maintain independence. For example, the firm:

* Does not perform any prohibited non-audit services;

* Follows partner rotation rules for public companies (including counting pre-registration service years toward the partner's total in some cases);

* Must disclose in writing to the audit committee any relationships that may impact its independence in serving the company; and

* The compensation of the partners assigned to the engagement must not depend on selling services to the client other than audit, attest or review services.


Although accounting firms are precluded from performing services as described above, there are other services that a second firm may provide in association with the public offering.

For example, firms with partners and other senior-level personnel with experience taking clients public can act in a consulting role to a company. In the post-SOX world, companies often find such an arrangement beneficial because they need help understanding and adhering to the stringent documentation and reporting requirements to which they will be subject after the IPO process gets under way.

In this case, the same independence rules that prohibit the "signing" CPA firm from providing advisory services often opens the door to other firms to act as the secondary, advisory service provider.

Because an IPO advisory engagement is not subject to the same prescribed rules and guidelines that define a registration-related audit engagement, the precise nature of the services offered can vary greatly from company to company, but might typically include:

* Transaction support services

* Planning and managing the IPO timeline

* Advising on selection of underwriter and other service providers

* Preparing financial statements

* Preparing EPS, dilution and capitalization tables

* Implementing SEC regulations

* Developing and implementing internal controls

As with other areas of the accounting profession, registration-related services have evolved significantly over the last several years. While debate and evolution regarding this process will continue, the state of affairs provides broad opportunities for CPA firms to work with clients that are going public, provided that care is taken to maintain independence and to work within the established rules.

Don Williams is an assurance partner and partner in charge of Grant Thornton LLP's San Diego office. You can reach him at

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Author:Williams, Don
Publication:California CPA
Date:Dec 1, 2007
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