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Centri Case Study: How Centri Can Help in a Tight Auditor Regulatory Environment 

Challenge

In the current regulatory environment imposed on audit firms by regulators, auditors are adhering to the independence requirements set forth by the Securities and Exchange Commission (“SEC”) more than ever. Companies should already be preparing appropriate documentation to support positions taken; however, the increased scrutiny over independence further solidifies the need for companies to prepare their own technical accounting research position papers and their financial statements, which the auditors then audit. Further, not addressing the appropriate items that the auditors require during their audit can put the Company at risk of not achieving its timeline, which can jeopardize a potential capital markets transaction, if it is not already a public entity. Companies going through a public company type audit should ensure they limit their risk to their timeline caused by inadequate documentation needed for an audit. 

Under the Sarbanes-Oxley Act, the CEO and CFO of publicly traded companies are required to issue a statement certifying that the financial statements and disclosures present fairly, in all material respects, the operations and financial condition of the Company. Being the CEO and CFO of a public company subjects you to significant risks.  Such risks are included, but are not limited to, personal legal liability for compliance failures, potential penalties for misrepresenting financial statements, and potential reputational damage from corporate misconduct. In addition, the CEO and CFO must maintain strong oversight of internal controls over financial reporting, as they are held accountable for their accuracy.

In a recent example, a revenue-producing technology company was preparing for a traditional IPO, where they had never been audited. This was a significant step for the company, as going through its first PCAOB audit before an IPO is a rigorous process. PCAOB standards are designed to ensure higher transparency and investor protection, which means the audit will be more in-depth than a standard AICPA audit.

Action

The Company engaged Centri to take an inventory of items that would likely be requested by the auditors to support their unqualified opinion. Centri identified several areas of documentation and assessments that needed to be enhanced that included but were not limited to, the adoption and application of ASC 606- Revenue Recognition, ASC 842-Leases, and ASC 326-Credit Losses, as well as the accounting and classification for various equity instruments issued since inception of the Company such as preferred stock, warrants, and simple agreement for future equity (“SAFE’s”).  This also included obtaining valuations for the related financial instruments issued upon initial issuance and at the required reporting period ends. All of this was in addition to preparing SEC financial statements with supporting workbooks, footnote support, and a disclosure checklist. Centri worked with management and the auditors to prepare a detailed timeline, presenting a project plan that would help the company achieve its filing goals, as well as ensure the auditor could complete their required procedures.

Resolution

Centri’s technical accounting experts successfully assisted the Company in completing its first PCAOB audit and filing its registration statement timely and accurately. Our collaboration with the Company and the auditors mitigated risks to the Company by having adequate supporting documentation and meeting its timeline. Centri was able to save the Company money by limiting inefficiencies and additional costs that may have arisen from time spent by the auditor on areas not properly addressed by the Company. Additionally, Centri enabled the client to maintain focus on core business operations while serving as the central contact throughout the audit process, a stage that is frequently complex and burdensome. As a result, the Company, supported by its PCAOB audited financial statements, was well-positioned to pursue a transaction in the public markets, alleviating concerns from potential investors regarding the completeness of its financial reporting.

Blake Roberts

Partner | Technical Accounting Practice Leader | CPA

Blake is a Partner at Centri Business Consulting and the leader of the firm’s Technical Accounting Practice. He has more than 18 years of public accounting experience. View Blake Roberts's Full Bio

Michael Kirchner

Vice President of Quality | CPA, MBA

Mike is the Vice President (VP) of Quality at Centri Business Consulting. He joined Centri in February 2022 and has over 20 years of expertise in accounting, advisory, and audit services. View Michael Kirchner's Full Bio