Life of a Public Company

Alex Lalka:

Having a very strong CFO for a public company is crucial from my experience, because that person is really the quarterback in trying to get a lot of this done. So, in my experience, at least, it's vital for public companies, as they start this process and going through their go public transaction RPO, that they pick someone who has a lot of experience. And not only with experience someone that they can work with.

Narrator:

Welcome to Accounting For The Future, a BDO Canada podcast for financial leaders to navigate change and achieve business growth. We'll uncover the challenges financial leaders may not have dealt with yesterday but will definitely have to manage for the future.

Armand Capisciolto:

Hello and welcome to Accounting for The Future. I'm your host, Armand Capisciolto, BDO Canada's National Accounting Standards partner and leader of Accounting Advisory Services. On today's episode, I'm joined by Alex Lalka, a partner at Miller Thompson in their M and A and securities group, and Anne-Marie Henson, a public company partner in BDO's Montreal office. And more importantly, really, really important, my first repeat guest on accounting for the future. So, if you like what you hear from Anne-Marie today, I highly recommend you check out our episode on Accounting for Scale Up to hear more from Anne-Marie. Alex, Anne-Marie, welcome to Accounting for the Future.

Alex Lalka:

Thanks, Armand; happy to be here.

Anne-Marie Henson:

Thanks, Armand. Really happy to be here once again. Very excited.

Armand Capisciolto:

Yes, yes, it's always fun to chat with people about accounting, at least, I think it's fun to chat about accounting and hopefully, our listeners find it fun to listen to people chat about accounting. But today, we're going to talk about life as a public company, and I think this is a really interesting discussion. And when I think about kind of 12 months ago, even 24 months ago, I was having a lot of conversations with people about going public. Capital markets were really hot, lots of activity, traditional IPOs we saw, companies going public through reverse takeovers with a shell company or mergers with SPACs, you name it. Companies were finding ways to access the public markets. And things have changed a little bit over the past, I would say, seven or eight months with what's happening in the capital markets. And Anne-Marie, you and I work together a lot, so we know what each other is seeing. Alex, what has your experience been like if you think about 12, 24 months ago versus what you're seeing now?

Alex Lalka:

Yeah, Armand, it's been sort of a whirlwind in the last 12 to 24 months, in particular with going public transactions. So, RTOs and IPOs, we've been seeing a lot of activity in the market in new companies going public, not only businesses in Canada but also businesses outside of Canada in the US and Europe and in other jurisdictions in accessing capital and going public in Canada. So, 2021, from my experience, has been one of the busiest years relating to going public transactions. And that's advising private companies through the going public process and sometimes acting for shells, but mostly acting for target companies and RTOs and companies that are just going through the traditional IPO process. So that was a large part of my work last year, is advising those companies going through that going public scenario, of going through and getting approvals from the regulator or the stock exchange.

This year it's been a bit slower in terms of the going public transactions. There's not as many IPOs, there's not as many companies that are able to raise funds in the capital markets. So, we've seen a bit of a slower period in that respect. But things, in my experience, tend to turn on a dime, and the markets can get very busy at a moment's notice. So, this year we spent a lot of time advising companies that have already gone public and going through those growing pains of going through being a private company, going through the go public process, now becoming a reporting issuer in Canada and all those things that entail being a public company and advising the directors and officers properly in that respect.

Armand Capisciolto:

Yeah. And those growing pains they're something every company goes through as they become a public company. And Anne-Marie, you've seen a lot of companies of different sizes go through that go public process and then you've continued on servicing those clients as the auditor of them now as a public company. When you think of, as Alex just talked about, those growing pains, what are the most significant growing pains you've seen companies go through that go public and getting used to life as a public company?

Anne-Marie Henson:

I think what I've seen most often is companies and management will breathe this huge sigh of relief, and once they've gone public, and they've completed their IPO, or their go public transaction, and they think they've crossed the finish line. And unless they've been through it before, they haven't really crossed the finish line, they've gotten to the starting line, really, of a completely new life as a public company. So, what I'd say is the biggest, and the most important mentality shift that has to happen is realizing that you now have to answer to a board of directors, to an audit committee and ultimately to a really wide range of shareholders about the decisions that you're making in your business and why.

And so, it's often a really huge change within an organization where previously maybe you were just answering to a small number of shareholders and your lender and now all of a sudden you have to really explain what you're doing, why you're doing it, and hold yourself accountable to a lot of different people who have different interests into your company. And so that impacts not just the accounting and finance function. And I'll take off my sort of auditor accountant hat for a second and speak more to the importance of an incredibly strong leadership team that can manage change and help sort of move and change the culture of the company going forward. So, I'd have to say that shift, it impacts every aspect of the business, from accounting all the way to operations.

Armand Capisciolto:

Yeah, it's interesting you talk about that mentality shift. I often, when I talk to companies that were private and maybe even owner-managed, right? Forget a few shareholders, just accountable to themselves. I always say now, when they go public, they're playing with other people's money. Not that they're playing with money, right? Everything's nice, proper, what they're doing with it, but it is someone else. It's not just your money anymore when you go into the public markets, it's the investor's money, and that is a mentality shift from it was yours, and you could do what you want to, others have given you that money and now you have a responsibility to take care of it appropriately. And Alex, I think that brings me to my next question for you. When Anne-Marie talked about leadership, and I think there's different aspects of leadership, obviously you have the C-suite executives, but you also have the board and the governance processes that need to be involved. Can you talk a little bit about those requirements related to boards and audit committees and the governance that a company now has to, the governance requirements a company has to comply with as a public company?

Alex Lalka:

Yeah, no, it's very important from the outset in a company going through a going public process, is to have the right team in place that's ready to go when the company completes their IPO or they complete an RTO transaction or some other going public transaction. And the stock exchanges in Canada already have policies in place where you have to have a sufficient amount of public company experience on your management C-suite executives and on your board. But I would just want to stress that from the beginning, if a company that's closely held, for example, and has really no experience being a public company or how a board functions is to have people in place that have a lot of experience with capital markets, and specifically ones that have been on boards for public companies in Canada or in the United States. And we look at that very closely as advisors for companies that are going public to ensure they have a significant amount of public company experience with its board. So, they understand how a board is supposed to function as a public company and, having regular meetings and having proper minutes, disclosing conflicts, dealing with different committees, understanding what the disclosure requirements are for the company and related requirements under securities laws.

Number two, with an audit committee that, is the one committee that is a requirement under our securities laws to have. There's other committees that public companies have, such as a nominating committee or a compensation committee or corporate governance committee, disclosure committee, what have you. But with the audit committee, that is something that the stock exchange looks at very closely when you go through the going public transaction or an IPO. And it's important that you have people that sit on the audit committee that have audit committee experience, and they understand what's involved in going through an audit and having financial statements prepared, dealing with an auditor, the filing deadlines, et cetera. And I would say having the requisite experience is the most important thing.

Also, I'll add to that, is having proper advisors, having an experienced securities lawyer that works with public companies that understands the rules and other requirements that the board can go to for sage advice. So, in a nutshell, you'd have to look at experience, and you'd have to look at having the proper advisors that are going to guide you through the way because there's going to be a lot of people once you go public that have never worked with a public company. They don't know the requirements. It's important to have sage advice and having the people there that have done this before.

Armand Capisciolto:

It's interesting when you talk about the advisors, and obviously, we're accountants here, lawyers; we all like to advise companies. So not to be too self-serving here, but it's really, really important because I think when you think about a company, especially a closely held company and owner-managed business, not that they don't have it, they have plenty of advisors right now, but those advisors may not have the experience with going public. So it's even shifting who you're getting advice from is critical. And it's not saying you were getting bad advice in the past; you were getting great advice in the past, but the people you were getting advice from the past might not have the experience that is needed to provide you advice going forward.

Alex Lalka:

It's having the right advice, therefore, in the context of a public company and through the lens that the board has fiduciary duties and has obligations to its shareholders. It's a bit of a complex series of laws that you're going to be getting into once you are a public company, and you need to have the right advisors there that's going to navigate those rules and requirements with you.

Armand Capisciolto:

Yeah, no, very, very good point. Anne-Marie, when we think about, we just talked about the board, audit committee; you brought up the leadership team. When you think about, again, a company going public and changes that they would have to, are there changes that they have to make with their management team? Are there new roles that are going to be required maybe that they didn't need as a private company?

Anne-Marie Henson:

Absolutely. And in terms of the corporate or reporting team that needs to be put in place, you can't emphasize enough the importance of having a strong team. You may need to hire more, and the roles and responsibilities change as well. So in terms of the financial reporting function, I see it sort of in two parts, but I think they're two really equally important parts. The first is your day-to-day accounting and record keeping, which has to change from what you were doing previously. You can't just wait till the end of the year to record depreciation or expense your prepaids or things like that. That has to be done on a monthly basis. And you have to be able to have proper cutoff and accruals done on time for your quarters. Like Alex mentioned, the importance of knowing what your filing obligations are and what your deadlines are critically important for a public company to be able to stay a public company in good standing.

And so that role changes a lot in terms of your internal accounting function. And then the second piece of it, which is an add-on and maybe not something you had to worry so much as a private company or an owner-managed business, was having a reporting team that has a proper understanding of complex accounting and really someone who can stay up to date on standards and understand how they impact your company and the contracts that you enter into, making sure that they're recorded properly, that they're disclosed properly in the financial statements. And whereby previously you may have relied a lot on your auditors as advisors helping you a little bit in that, with the need to the auditors maintaining independence and really truly staying as auditors, they're not able to necessarily give you the advice that they used to when you were a private company. So whether you hire internally or you rely on good external consultants and accounting advisors to help you when you need them, it's so important to make sure you have that in place.

Armand Capisciolto:

Yeah, it's interesting. It's very similar to what Alex was saying about board and audit committee members. That experience, you know, you might have a great controller, a great finance person as a private company, but do they have the experience with quarterly reporting? Do they have the experience with all of the other continuous disclosure requirements that you now have to comply with as a public company? And I think it's interesting, I'm going to make a plug for some of our other episodes because we talk about this regulatory burden that comes with being a public company. And as much as regulators and others are trying to reduce that regulatory burden, investors and others are always asking for new information. And part of that new information they're going to be asking for and are starting to ask for, and regulations are coming in for, relates to sustainability and climate risk disclosures, which we have a number of episodes on those topics.

So as any good podcast host, I have to plug our other episodes. So just check out our site to see some of those episodes on sustainability reporting. But back to our discussion at hand. Alex, when we think about these continuous disclosure requirements, we think about quarterly filing deadlines, when you have to press release things when you have to... All the different information you have to make available to investors through the regulatory requirements. What happens when companies miss these deadlines when they don't comply? What are the implications to the company and to their board members?

Alex Lalka:

Well, it's not good, Armand. And I would quit the liability in two buckets, and I'm generalizing here, but there is liability for the company directors and officers that we call secondary market liability and claims that can be made by investors in the market. If the company puts out public disclosure that has a misrepresentation in there or if there is a missed deadline and no disclosure is made when disclosure should have been made, there could be somebody who had acquired shares and is a shareholder and relied on that misrepresentation. And a misrepresentation would include something that is not correct in the disclosure or something that would be omitted from the disclosure. So it's important to understand that it's not information that is wrong necessarily, but it could also include that material that was omitted from the disclosure that should have been made. The other bucket is the commission has sweeping powers and can go after a company or its directors and officers if they're in breach of securities laws.

And if the individual director and officer acquiesced or was involved in a misrepresentation or in a breach of securities laws, and that could mean fines against that individual, it could mean that the individual will be barred from participating in the capital markets. So at the end of the day, Armand, it is serious if a company is not compliant with its disclosure or doesn't understand what the disclosure is required on a timely and on a continuous basis as a public company. And that goes all back to the theme of you need to have experienced advisors, you need to have people who, on the board, who have experience understand what these rules and requirements are.

Armand Capisciolto:

Yeah, it's interesting. The whole idea of the omission can cause problems. And that's where that experience comes into play, right? Because you don't know what you don't know, and if you don't know you're supposed to disclose something and you omit it, that could be just as bad as disclosing something that's wrong. I guess ignorance is definitely not bliss in these scenarios.

Alex Lalka:

Definitely not.

Armand Capisciolto:

So, Anne-Marie, I would love to say that all of the companies we work with are perfect, but we all know no company's perfect. I think, Alex, you would say the same probably about the companies you work with. We're all striving to be better, but there's always room for improvement. We have both had experience with companies struggling to meet those deadlines. They have their quarterly deadlines, their annual deadlines, whatever they're shooting towards. So when you think about this and think about how they've put them, about these positions we find companies in, does this create any risks for them as a company, this kind of rushing to meet deadlines? And secondly, what can they do to put themselves in a position that they're not going to create these risks? Assuming you say there's risks, maybe I'm leading the question, but you're leading the question with the second part there.

Anne-Marie Henson:

Right, well, the obvious risk here is filing financial statements or presenting information that is incorrect, and that's material, and that needs to be subsequently restated to be corrected. And it's really sort of the worst case when you talk about the rushing to file, is having to go back and restate. And the reason for that is, first, obviously, it's expensive. It's expensive in terms of externally, you know, you have to probably get your auditors involved in looking at the restatement. You have to get your lawyers to help you refile. It's expensive internally as well. It takes time. It's moving your finance team, it's moving your people away from the things that you would like them to do, like working on forecasting and strategy and growth and having them have to turn around and look at historicals to fix the error. It can also obviously be demoralizing for the same reason internally to have to go through that process.

It's a stressful time for everybody to be involved when you know that a mistake has been made that has to be corrected. Ultimately it could lead to having to disclose to the public about having material weaknesses, which are never fun to have to disclose to investors and explain why this error was missed in the past. And ultimately I think could erode investor confidence if it's something that happens really early on, a company just goes public and then has to restate, or even if it happens a couple of times. So it's not something that's great to deal with and that you want to avoid. And I think in trying to look perhaps at the positive side of things and not just speak about the negative consequences, the great thing about being able to plan for transactions and understanding the complexities and accounting in advance of having to present them and record them and disclose them is the ability to make better decisions.

And I'm going to plug the podcast that I was on with you as well, where we talked a little bit about this with scaling companies, but it applies not just to scaling companies, it applies to public companies as well. I can think of a situation where a very long-term contract of a company led to the revenue having to be recognized only once the product was completed and delivered. It's a four-year contract. So understanding and being able to explain to investors why you're not going to see revenue for four years versus having it recognized over that four year period is really important and allows you to better plan for that and to be able to manage that kind of stuff a lot better.

Armand Capisciolto:

And it's avoiding those surprises. And really, when we're rushing or we're not thinking ahead of time, that discussion didn't happen with the board. It didn't happen at the investor presentation that this is what the implications are going to be. And then everybody's surprised, the board is surprised, the audit committee is surprised, investors are surprised. And when there's surprises, people don't like it. And it could have a negative implication on the company. And that's important. The other thing is you're talking about rushing, and I think you and I have both been in this experience, is when a company's rushing and I'm going to put my auditor hat on, I know what they're doing when they're rushing to get things done and they're dealing with it the last minute.

Not all the processes that they would normally follow are being followed and there is a greater risk of them making an error. So then as the auditor, if they're rushing, it's almost like I feel like, well I can't rush, because I know that they may have skipped some steps to get this thing done as quickly as possible. So my skepticism as an auditor goes up, which might actually take me more time now than if the company took its time. So I think the other thing is companies have to think about assurance and the time assurance takes in building their schedules so they're not in those circumstances.

Alex Lalka:

Rushing, not only could it be negligent, but it could also have the opposite effect of trying to speed things up.

Armand Capisciolto:

Yeah, exactly. You could actually slow it down by speeding up because, you know, you're going quick and then all of a sudden, oh, because we went quick, there was another mistake made, which then needs to be fixed. And again, not saying this happens a lot, but it can happen. And anytime you're rushing, it's always nice to take a pause and slow everybody down and realize the goal is getting this right. Yes, we have to get it out, but the goal should always be getting it right. Alex, anything that you want to add to that discussion on what you see when companies are rushing?

Alex Lalka:

Look, in terms of rushing and advising those companies that sometimes they get to a point where they're hitting a wall and they need to get things filed very quickly and they're sort of disorganized, it's really important if it's only one or two people at the company that are doing these things, to get more people involved so they can delegate properly. So it's not just under one person or two people's responsibility to get something done. And also having regular meetings up until the filing deadline so everyone understands what needs to be done and things can be delegated appropriately.

So in terms of sometimes you're a few days away from filing and there's so many things to do, it's good to have regular meetings each and every day before the filing deadline. So everyone has an understanding of what needs to be done. It's always a good idea to start early, have things set out in a timetable of when your deadline is, and make sure certain things are done on certain days that where there's milestones that need to be achieved before the audit is completed or the quarterly financials have to be filed or the MDNA needs to be prepared or the AIF needs to be prepared. So it's always good to start early, but sometimes that's not always the case and we have to deal with it when there's a scramble.

Armand Capisciolto:

I really like the idea of the regular meetings, especially with how integrated everything is. It's one thing to say, oh, there's a late adjustment that needs to be made to the financial statements. But then that late adjustment to the financial statements has to make its way through the MDNA, it has to make its way through all the other documents, and that all takes time. And if you have different people doing different things, if not everybody's aware of what's going on, what those meetings can really help with, you can miss other things. I really like that idea of the meetings.

Alex Lalka:

And from my experience, and I know you guys are on the financial side and I'm on the audit side, is having a very strong CFO for a public company is crucial, from my experience. Because that person is really the quarterback in trying to get a lot of this done. So in my experience at least, it's vital for public companies as they start this process and going through their go public transaction RPO, that they pick someone who has a lot of experience. And not only with experience, someone that they can work with and someone who is willing to be in the trenches with them when things get busy and people need to stay up late and things need to get done for a deadline.

Anne-Marie Henson:

Yeah, I couldn't agree more with that. I think a strong CFO and like you said, someone with experience who's not afraid to roll up their sleeves and get involved when they need to, but that can also recognize when they need to delegate, when they need to call their experts, when they need to bring in a consultant if something's over their head. I think you can't underscore the importance of having that, like you said, quarterback to be able to lead that process within a company.

Armand Capisciolto:

Yes, loving the football, the quarterback analogy. We're recording a couple days after the Blue Jays blew an 8-1 lead to get eliminated, so I would've been very depressed if you would've used baseball analogies. So thank you for not using baseball analogies today. Alex and Anne-Marie, thank you so much. Myself and our audience appreciate your time and your expertise. And thank you to our listeners for tuning in today. Please let us know if you found this topic interesting and useful, and remember to subscribe if you liked it. We're going to take a short break throughout December. Our regular schedule will resume in the middle of January with a new line of guests and topics. I'm Armand Capisciolto and this has been BDO's Accounting For The Future. We'll see you next time.