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.
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:
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.”