Why Your IPO Auditor Can't Keep Your Books

Founders preparing for an IPO often assume the audit firm will help "get the books ready." It can't. Under SEC independence rules, the firm that audits your financial statements generally cannot be the firm that prepares them. Here is why, what the rules prohibit, and how companies without a full public-company finance team fill the gap.

What the auditor is there to do

An independent auditor plans and performs an audit under PCAOB standards and issues an opinion on whether the financial statements are fairly presented. The opinion is only worth something if the auditor is checking someone else's work. The SEC's independence framework rests on that idea: an auditor should not audit its own work, perform management functions, or act as an advocate for the company.

What the independence rules prohibit

The SEC's auditor independence rule, Rule 2-01 of Regulation S-X, lists non-audit services an auditor cannot provide to an audit client. The ones that matter most before an IPO:

• Bookkeeping and related services: maintaining the accounting records, preparing the financial statements filed with the SEC, or preparing the source data behind them, unless the results will not be subject to audit procedures.
• Financial information systems design and implementation: designing or implementing the systems that generate information significant to the financial statements.
• Management functions: acting as a director, officer, or employee, or performing any decision-making, supervisory, or ongoing monitoring function for the company.

For a company filing with the SEC for the first time, the auditor generally has to meet these rules from the first day of the last fiscal year before the company first files. If the firm that keeps your books today expects to audit your IPO, one of those roles has to change, ideally before that period begins.

The gap smaller companies face

A large company going public usually already has a controller, an SEC reporting manager, a technical accounting lead, and a tax director. A company preparing for a smaller listing often has a bookkeeper and an outside tax preparer. The auditor cannot fill the missing roles, and the company still owns the financial statements, the footnotes, the accounting positions, and the tax provision.

Three ways to fill it

• Hire. Build an in-house team before the audit starts. This is the long-term answer, but experienced public-company controllers are hard to find on a deal timeline.
• Use a separate accounting firm. An outside firm that is not your auditor prepares the conversion, schedules, memos, and tax provision with your team, and steps back as you hire.
• Combine the two. Hire a CFO and controller, and use an outside firm for technical accounting, the tax provision, and peak workloads around the audit and the filing.

Dividing the responsibilities

Whatever the mix, write down who does what. Management prepares and owns the financial statements and makes the accounting decisions. The outside accounting firm, if you use one, does the preparation work with you and documents it. The auditor tests and issues the opinion. Securities counsel drafts the registration statement and handles SEC correspondence. Confirm independence with your audit firm before any preparation work begins.

OICPA's IPO Readiness Assessment shows where your books and team stand against what the audit will need, and our IPO Readiness Accounting team does the preparation work alongside your independent auditor.

Frequently asked questions

Can our auditor give us advice on accounting questions?

Auditors can discuss the accounting with you and tell you whether they agree with a position. They cannot make the decision for you or prepare the analysis that becomes your financial statements.

Does this apply to the tax provision too?

The tax provision is part of the financial statements, so its preparation should sit with management or a separate firm. Some tax services by the auditor are allowed with audit committee pre-approval, but they have limits; confirm the specifics with your audit firm.

We already use our audit firm for bookkeeping. What now?

Talk to the firm early. One of the roles will need to move to another provider before the period that has to be independent, and the change takes time to plan.

General information only, not tax, accounting, or legal advice.