color-burst

Perspectives

Restatements and remediations after an IPO or de-SPAC

Lessons from public offerings and the de-SPAC process

When initial public offerings and de-SPACs surged, restatements did as well. What lessons can we draw from these transactions? Here’s what company CFOs tell us—and what you can do to address and potentially prevent restatements and related remediations.

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.

Accounting restatements and remediations: insights from recent IPOs and SPAC mergers

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.

Common areas for restatements

Based on SEC filings of newly public organizations since 2020, accounting restatements were typically related to five specific areas, each of which generally requires technical accounting and reporting expertise: revenue recognition, deferred tax assets and liabilities, leases, equity awards, and earnings per share (EPS).

  • Expand all
  • Collapse All

ASC 606, Revenue from Contracts with Customers, is a complex standard that has led to numerous restatements. It requires the application of a principles-based framework to recognize revenue, which often involves the application of significant judgment and may result in changes to the timing or amount of revenue recognized compared to legacy GAAP. Not surprisingly, revenue recognition is a topic on which entities commonly seek SEC guidance in prefiling submissions, and these topics are frequently discussed in SEC staff speeches (e.g., at the annual AICPA & CIMA Conference on Current SEC and PCAOB Developments), underscoring, perhaps, the level of complexity.

ASC 740, Accounting for Income Taxes, further increases the risk of restatements for newly public companies. This standard governs recognition, measurement, presentation and disclosure of income tax assets and liabilities, and requires a thorough understanding of accounting and reporting matters. To comply with ASC 740, companies often need a set of tax basis books and records as well as a balance sheet. The risk of restatement can occur when a company underestimates or overestimates the amount of income tax expense, deferred liability or assets in its financial statements. For newly public companies, organizational/structural changes increase these risks. Private companies, for example, are often passthrough entities (partnerships, LLC, etc.). Upon going public, they become corporations with a new set of accounting rules.

ASC 842, Leases another relatively new accounting standard, has far-reaching impacts on leases. The lease standard brought many leases onto the company’s balance sheets, which can significantly impact its financial statements and could cause errors associated with lease accounting to be more material as compared to legacy GAAP. To accommodate this standard, entities not only have to change their accounting for and financial reporting of leases, but also their related systems and processes.

The complexities of applying the accounting guidance for the treatment of equity awards such as stock options and restricted stock units (RSUs) has also led to numerous accounting restatements. Warrant liabilities had an outsized effect on SPACs and companies that went public via SPAC merger, generating hundreds of restatements involving these entities. Most of these companies recorded warrants as equity at historical cost; however, the SEC issued a statement requesting companies to rethink whether the shares were indexed or included a tender offer provision. Warrants that are not indexed to a company’s own stock or that include a tender offer provision should generally be recorded as a liability with fair value adjustments recorded on a quarterly basis through the income statement.

EPS is a widely used calculation to assess a company’s financial performance. On the surface, EPS may seem like a straightforward calculation; however, the nuances of applying EPS guidance can be highly challenging. The process often involves information from disparate reports and schedules and may result in manual calculations, all of which increase the likelihood of miscalculations and restatements.

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.

What to do once you have a restatement and a related remediation need

Accounting restatements often correlate to the maturity of an organization’s internal controls. But even the most proactive companies can find themselves in a situation requiring restatement and remediation. When that happens, responding quickly and methodically is important:

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.

1. Charmaine Wilson, “Assurance by design: Insights for a controls approach to transformation,” Deloitte, November 2021.

2. Ibid.

3. Ibid

4. Deloitte, "Perspectives: Financial remediation and restatement," 2022

5. Deloitte, "IPOs: When C-Suite hindsight is 20/20" May 2022

6. Ibid

Contact us

 
 
 
 
 
 
 
  Yes         No

Get in touch

 

Hogan Miller
Audit & Assurance Partner
Accounting & Reporting Advisory Services
Deloitte & Touche LLP
+1 713 982 2586

    

Kori Reeves
Audit & Assurance Senior Manager
Accounting & Reporting Advisory Services
Deloitte & Touche LLP
+1 713 982 4291

    

Mary Schmidlin
Audit & Assurance Senior Manager
Accounting & Reporting Advisory Services
Deloitte & Touche LLP
+1 720 264 4879

Contributors:

            

Nick Accordino
Audit & Assurance Partner
Accounting & Reporting Advisory Services
Deloitte & Touche LLP
+1 330 329 2306

    

Jamie Davis
Audit & Assurance Partner
Accounting & Reporting Advisory Services
Deloitte & Touche LLP
+1 312 486 0303

    

Lindsay Rosenfeld
Audit & Assurance Partner
Accounting & Reporting Advisory Services
Deloitte & Touche LLP
+1 313 310 0595

The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances.

Did you find this useful?
Remediation and Restatements Services

Accounting restatements addressing deficiency material weakness

The Pulse

Access briefings, quick-hit updates, and timely perspectives on recent audit and assurance topics.