Operating as a public company is a lot of additional work for a finance team that may already be lean. That's why it's important to get the extra help from advisors to ensure that you can pull it all together and function as a successful public company. If you're struggling with this new phase of your business lifecycle, BDO experts can help you get back on track.
Published: May 24, 2022
Updated: May 24, 2022
After ringing the bell at the stock exchange and after the celebrations have ended, comes the really hard part: successfully operating as a public company. What are your plans for a successful future? Do you know how you will deliver on your promises to shareholders? How will you maintain regulatory compliance?
BDO's Public Company and Accounting Advisory experts have seen this unfortunate scenario arise. Companies and business owners see the process of going public as an end goal rather than a starting point. They haven't given enough thought to what it means to be a public company; they've underestimated the work it takes to operate successfully, and they haven't set up the proper infrastructure to comply with the much more stringent and complex regulatory environment listed companies are subject to.
In this article, we cover what you need to consider now that you are a public company, including the importance of establishing good corporate governance and properly resourcing your financial infrastructure. Ideally, you've made these considerations before going public, but if your business is struggling it's not too late to turn things around. BDO experts can help you navigate these challenges and get you back on the road to success.
Being a public company requires a mentality shift
The process of going public requires a transition from a mindset of “you” as an individual, to a mindset of “we”. The needs, responsibilities, and goals of the corporation now supersede those of the business owner or founder.
“The mentality shift is often one of the hardest shifts to make, especially for a founder that continues to be involved with the business after it has gone public,” said Jeanny Gu, Partner, National Public Company Leader at BDO Canada. “This was originally a company that you owned, and maybe it was a family business. Now you're managing other people's money and you need to make decisions that are best for the business, taking into consideration that you are now accountable to other shareholders,” she added.
You will now have to prioritize the importance of following due process and proper governance in light of the way you will be viewed by your shareholders and the investment community at large.
Has the public company established good corporate governance?
Once a company goes public, good corporate governance is key to its long-term success. Management must ensure the company is in compliance with the requirements of regulators, listing exchanges, and all relevant corporation acts. Best practices will require a strong board of directors and independent audit committee. Public companies are under more scrutiny than ever before, with the rise of ESG reporting and calls for more transparency, the role of the board and the audit committee is important and evolving. Selecting the right members can ensure your newly public company thrives and operates with integrity.
Board of directors
Elected by its shareholders, every public company must have a board of directors consisting of at least three directors, at least two must be independent. The size and composition of a board will vary depending on specific company needs, with consideration given to level of experience, expertise, diversity, and stakeholder interests. Directors are accountable to public shareholders and key management. They must protect shareholder interests and are legally responsible for disclosing information about company operations. A strong board of directors with a broad range of expertise is an invaluable asset for any company.
Audit committees
Every public company must have an audit committee with a minimum of three members who are independent and financially literate. An audit committee member is independent if he or she has no direct or indirect relationship with the company. This means, no relationship that could be reasonably expected to interfere with the exercise of a member's independent judgement. Financial literacy is defined as the ability to read and understand a set of financial statements with comparable breadth and complexity of accounting issues.
Have you properly resourced your financial infrastructure for a public company?
The minute you go public, your financial reporting requirements change—have you set up the proper infrastructure within your organization to meet these new demands?
“Many companies spend a lot of time getting ready for an IPO, putting their focus on marketing and raising money,” said John Asher, Partner, Risk Advisory Services at BDO Canada. “And as a result, the time and resources needed to develop the proper financial reporting and governance infrastructure is at times neglected. Enlisting the help of the right advisors can prevent you from having to play catch up and taking on more risk than necessary,” he added.
Some of the changes to the finance function may include:
- Accounting standards used to report financial statements
- New and expanded financial disclosures
- Financial guidance to investors
- Enhancement of internal control documentation
But perhaps the most onerous change becomes the frequency and intensity of reporting (quarterly and annual), and the fact that these reports have strict timelines with little room for negotiation. Public companies could possibly see their stock prices fall if they are unable to file periodic financial statements accurately and on time, without fail.
In addition, public company CEOs and CFOs are required to personally attest to, and sign off on, the design and effectiveness of the internal controls as part of the financial statement filings. If you are signing off on internal controls over financial reporting, you need to be confident that they are effective. As a result, there may be a need to set up internal control compliance functions and engage professionals who have experience in the assessment of internal control effectiveness. Worthy to note, this is not something your independent auditors can help with. They need to remain independent given they must conduct their own assessment of the effectiveness of internal controls.
What are the consequences for non-compliance for a public company?
Companies that fail to devote sufficient time and attention to their finance and governance functions are vulnerable to all sorts of problems. The result is increased risk and loss of trust from shareholders; it's simply not a successful strategy.
If a company fails to file financial data in a timely fashion, violates securities laws, or officers and directors do not exercise fiduciary care when overseeing operations, it could be subject to a full cease trade order and possibly face delisting—a loss of credibility that can be catastrophic for a business.
“When we see companies in this position it often comes back to who they chose as their independent directors. It's imperative to bring on board candidates that have experience running public companies, and an understanding of securities laws, accounting principles, and the experience to know when they need to bring in other experts,” said Jeanny Gu, Partner, Accounting and Advisory at BDO Canada. “You need to recognize you're in a different playing field. Companies that don't have the right mix of skill on their board are most at risk of making critical mistakes.”
How BDO can help
The information in this publication is current as of May 24, 2022.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.