Restatements and remediations after an IPO or de-SPAC

A parallel rise in IPOs and restatements

The initial public offering (IPO) surge of 2020 and 2021 resulted in record numbers of US companies—more than 800—going public either through a traditional IPO or a SPAC merger.¹ Public company restatements rose commensurately in 2021, from less than 400 to 1,470, an increase of 289%.² The parallel rise in IPOs and restatements is no coincidence; of the companies that went public, more than three-quarters had a restatement.³

A 2022 Deloitte survey, moreover, found that 59.1% of public companies revised or remediated one or more financial processes in the past 12 months, and 51.6% said they expected to do so in the next 12 months.⁴ A deeper dive into newly public companies that had a restatement, based on Deloitte’s discussions with company CFOs, helps us understand what leads to these events.

People, processes, and technology not keeping up with new requirements

While internal control issues can affect any company, newly public companies tend to be more susceptible to internal control weaknesses. These organizations are often still refining their internal controls, putting additional controls in place, establishing accounting policies, assembling their teams, and considering or implementing technology solutions—works in progress that can put a company at increased risk of controls deficiencies, restatements, and the need for related remediations.

Lessons learned from new public companies

Drilling down into the most common reasons for restatements, there are three recurring themes across the five areas that surfaced in conversations with finance leaders in newly public companies:

• The relevant accounting standards were particularly complex and required companies to use more judgment and make more estimates.
• Navigating the complexities also involved manual processes or multiple schedules and spreadsheets that were not properly controlled, increasing the likelihood of errors.
• Existing accounting staff did not have the required knowledge, experience, and specialized skillsets, which is not unusual for a newly public company trying to comply with unfamiliar standards.

According to the CFOs Deloitte surveyed, having a finance team with the appropriate skillsets, as well as a finance infrastructure to meet the objectives and demands of a publicly traded company, are among the most critical keys to a successful IPO and beyond.⁵ Not only is the team crucial, but having the proper processes, technologies and control environment in place is also extremely important.

The CFOs indicated that a scarcity of finance and accounting talent impacted and continues to impact implementation of systems, preparation of technical accounting analyses, implementation of a robust control environment, and the preparation and filing of SEC- and GAAP-compliant financial statements.⁶ Resource plans should consider alternative sources of required accounting and reporting skills and knowledge.

Why bring in an advisor?

If this sounds like a lot to do under intense pressure, it certainly can be. An accounting and reporting advisor can assist with the technical analyses often needed to assess the technical topics that cause challenges. For many companies that have recently become public, not having staff with specialized knowledge of new accounting standards can be a contributing factor to the restatement and will also be an obstacle in resolving it. An outside advisory firm that is up to speed in fast-moving accounting standards and has the required controls, governance, remediation, and PMO experience can often be the solution to putting a restatement and internal control material weaknesses behind you.

Preventing future restatements

After responding to a restatement and remediating the related process, how can you build a more resilient accounting organization to avoid a similar situation down the road? Doing so invariably will mean building an agile and capable team, a strong controls and governance framework, and a playbook for proactive remediation.

Staying on top of controls

Companies must continuously assess the sufficiency of their internal controls. Shifts in technology, regulation, and other business conditions require a new risk assessment and—potentially—new or changed controls to address those risks. Failure to keep pace can result in additional remediation.

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