Considering an IPO?

• Author: Yeager, Katy
• Position: Private companies - Initial public offering

Are you a private company thinking of launching an initial public offering, or IPO? You're likely to have a considerable amount of company.

After the number of filings dipped from an all-time high in 1999 of 486 to a low of 68 in 2003, filings for IPOs are once again rising. In 2006, 198 companies filed for an IPO; through July 2007, 143 companies had filed, representing a 40 percent increase over the same period last year. In fact, 2007 is expected to be a record year for IPOs, with an average deal size of $187 million.

But being public isn't without its pitfalls. In a 2007 survey completed by KPMG's 404 Institute, 24 percent of companies with fewer than $250 million in annual revenue reported having a material weakness in internal controls over financial reporting at some time in 2006, while 55 percent reported having significant deficiencies.

To avoid being one of those companies, there are a number of areas that deserve particular attention in the 12 months prior to, and immediately following, an IPO filing.

People, Processes and Systems

People. There are specific "must have" skills in a public company finance team, primarily U.S. Securities and Exchange Commission (SEC) reporting, revenue recognition and financial planning and analysis. No longer can external auditors be viewed as a company's source for technical accounting expertise. A public company must have these skills in residence or have access to robust technical accounting consulting help.

Once a company is public, it will face increased scrutiny from its auditors, regulators, analysts and the public at large, leaving no room for sloppy accounting, poor forecasting or an ineffective internal control environment. A restatement can dramatically hurt a company's stock price, and "getting it right the first time" requires the creation and fostering of a culture that maintains the highest technical accounting standards. This can happen only if high-quality, appropriately credentialed accounting staff work together.

Processes. For most companies that have grown quickly, processes likely remain informal and potentially incapable of scaling with additional growth. With the added regulatory requirements that come with being public, immature processes will likely break down, leading to incomplete or even bad data and downstream reporting irregularities. Every company planning to go public should look closely at its key financial reporting processes and evaluate (if not implement) plans...