With attention-grabbing names such as Arm as well as Instacart going public as well as Klaviyo expected to follow, experts are debating whether IPOs are returning. However, companies considering IPOs should be careful to avoid accounting mistakes.
Restatements and accounting errors soared 150% in the 2023 proxy season, according to ananalysis conducted by Glass Lewis. A large portion of this increase resulted from increasing demand for IPO and SPAC expansion in 2020-2021, the consultancy firm speculated, since younger companies are usually trying to develop internal controls.
Internal controls might not be the most exciting issue, but proper control is essential to ensure the business continues to be a viable company, Rich Brady, global director of the Institute of Management Accountants (IMA) and the CEO of the American Society of Military Comptrollers explained to CFO Brew. We spoke to him about how CFOs can manage modern, fast-moving cultures and the need for robust internal controls.
What are the causes for the errors or restatements in newer companies?
Many of the pertinent accounting standards [the SPACs relied on] were complicated and demanded a fair amount of judgment and estimation of estimates. when you incorporate judgments or estimates into accounting standards, disclosures are susceptible to errors in interpretation.
At a start-up there are a lot of manual processes taking place as well as a number of spreadsheets which don’t contain the controls and the security measures built into the spreadsheets, and then there’s no staff who have the experience, knowledge and capabilities to deal with the challenges of starting a business and the implementation of these new accounting policies and procedures while adhering to requirements of SEC and other regulations.
Startup culture can be in conflict in the absence of internal control?
If you consider startups, because of their nature, they’re looking to be courageous. They’re trying to be imaginative problem solvers. They’re a flat organization. It’s trying hard to appear flexible, nimble…aggressive. They do not necessarily translate to internal controls that are, by nature, controls. The style of leadership is different from in more established businesses.
What is the best way for a CFO to modify the tone at top of internal control?
In many startup companies, Cash is the king of the hill. It’s your goal to save the most cash you can to ensure you have enough time to get the product onto the market…When you think of internal control, you immediately consider, “Well, this sounds like overhead, isn’t it? This will cost us.” That’s a good method of thinking about internal controls.
Another approach is to consider internal controls as a facilitator for sustainable businesses. [The CFO is able to reframe] internal controls as not being an overhead and something that will slow a business down or slow development and innovation to think of them as a facilitator of sustainability over the long term.
Are the accounting shortage leading to an increase in restatements and errors?
Ah, absolutely…Whether you’re a startup or a reputable company, If you have plenty of open positions and you’re not able to handle all the areas you’ll need to cover in your finance department. You might not have the separation of tasks. You might not be able to concentrate your attention on all of the areas that you require. What we’re seeing in the SPACs and the recent IPOs and startups could be an indication of a larger issue.
Are CFOs being pressured to handle too much? Could this be the reason?
Obviously, the role of the CFO has elevated over the past few years to the point where they are taking on greater responsibilities…And part of that is the fact that the CFO has broad visibility across the entire organization, so sometimes it just makes sense [to say,] “Put all of risk management under the CFO.” But that may not be the best place for all of these activities because of the span of control issues. The CFO can only handle the responsibilities of a certain amount.
Accounting and finance is becoming more technological. There’s a lot of regulatory requirements…There’s the value judgments involved. So, companies have to be careful about placing too many different functions under the umbrella of one person. The main function of the CFO should be to perform the accounting and finance functions foremost.
