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1、2022 IPO materialweakness study 2Document Classification:KPMG Confidential 2022 KPMG LLP,a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.Al

2、l rights reserved.2022 IPO material weaknesses studyBackgroundAll MWs were identified in S-1 filings.These numbers do not include shelf registration,terminated IPOs,or IPOs that do not trade on exchangesThe purpose of our research was to understand the challenges related to internal controls over fi

3、nancial reporting companies faced at the time of their initial registration for new securities.Our scope included IPOs(including SPAC transactions)for U.S.companies listed on the NYSE or NASDAQ(excluded foreign private issuers)that closed between 1/1/2021 and 12/31/2021.There were 340 closed IPOs an

4、d 169 SPACs that met these criteria during 2021.Of the 137 IPOs that disclosed material weaknesses,only 12 were noted as having been remediated prior to the filing.Of the 102 SPACs that disclosed material weaknesses,only 2 were noted as having been remediated prior to the filing.Of the total data,13

5、7 traditional IPOs(40%)and 102 SPACs(60%)disclosed material weaknesses in their S-1/S-1A filings.Source:Audit Analytics MW S-1 data through 12/31/21.3Document Classification:KPMG Confidential 2022 KPMG LLP,a Delaware limited liability partnership and a member firm of the KPMG global organization of

6、independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.Summary of material weaknesses reported by recent traditional IPOs*Material weaknesses reported were often the result of more than one overlapping issue/challenge.Is

7、sues contributing to material weaknesses*Lack of accountingresources and expertise37%Inadequate/lack of formal policies and procedures50%Inadequate Control Design/Lack of Control34%Segregation of duties issue34%Systems/technology/ITGC25%Risk Assessment13%Control not operating effectively7%Material/n

8、umerous audit or YE adjustment5%4Document Classification:KPMG Confidential 2022 KPMG LLP,a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.Al

9、l rights reserved.Summary of material weaknesses reported by recent traditional IPOs(continued)Process Areas with highest concentration of Material Weaknesses*67%26%12%7%5%Financial close/reportingNon-routine/complex transactions RevenueSystemsControl EnvironmentEquityTaxMaterial weaknesses reported

10、 often overlapped multiple process areas.21%14%5Document Classification:KPMG Confidential 2022 KPMG LLP,a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited

11、by guarantee.All rights reserved.Summary of material weaknesses reported by recent SPACs*Material weaknesses reported were often the result of more than one overlapping issue/challenge.Issues contributing to material weaknesses*Lack of accountingresources and expertise25%Segregation of duties issue4

12、6%Systems/technology/ITGC25%Inadequate control design/lack of control24%Inadequate/lack of formal policies and procedures23%Control not operating effectively11%Material/numerous audit or YE adjustment3%Risk Assessment10%6Document Classification:KPMG Confidential 2022 KPMG LLP,a Delaware limited liab

13、ility partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.Summary of material weaknesses reported by recent SPACs(continued)Process Areas with highest c

14、oncentration of Material Weaknesses*97%37%17%17%17%Financial close/reportingSystemsAccounting EstimatesNon-routine/complex transactionsBusiness CombinationsControl EnvironmentEquityMaterial weaknesses reported often overlapped multiple process areas.30%17%7Document Classification:KPMG Confidential 2

15、022 KPMG LLP,a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.Comparison of material weaknesses reported by IPOs from 20

16、19 to 2021(excludes SPACs)5%7%13%25%34%34%37%50%13%13%5%21%36%61%39%64%7%17%5%20%32%63%32%78%0%10%20%30%40%50%60%70%80%90%Material/numerous audit or YE adjustmentsControl not operating effectivelyRisk AssessmentSystems/technology/ITGCSegregation of duties issueInadequate control design/lack of contr

17、olInadequate/lack of formal policies and proceduresLack of accounting resources and expertise201920202021Lack of accounting resources and expertise,inadequate control design/lack of control and inadequate/lack of formal policies andprocedures are consistently at the top and are significantly higher

18、than other factors contributing to material weaknesses.Source:Audit Analytics MW S-1 data through 12/31/218Document Classification:KPMG Confidential 2022 KPMG LLP,a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KP

19、MG International Limited,a private English company limited by guarantee.All rights reserved.Comparison of process areas with highest the concentration of material weaknesses from 2019 to 2021(excludes SPACs)1%2%5%7%12%14%21%26%67%3%4%10%5%14%12%19%25%74%2%2%12%10%7%10%17%34%73%0%10%20%30%40%50%60%70

20、%80%Business CombinationsInventoryTaxEquityControl EnvironmentRevenueSystemsNon-routine/complex transactionsFinancial close/reporting201920202021Financial close/reporting and non-routine/complex transactions remain the top two impacted process areas year-over-yearSource:Audit Analytics MW S-1 data t

21、hrough 12/31/219Document Classification:KPMG Confidential 2022 KPMG LLP,a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved

22、.Comparison of material weaknesses reported for SPAC transactions in 2020 to 2021Lack of accounting resources and expertise continued to be one of the top material weaknesses,while inadequate control design and inadequate formal policies and procedures saw a decline from 2020 to 2021.46%25%25%24%23%

23、11%10%60%37%33%63%47%7%13%0%10%20%30%40%50%60%70%80%90%100%Lack of accountingresources andexpertiseSegregation ofduties issueSystems/technology/ITGCInadequate controldesign/lack of controlInadequate/lack offormal policies andproceduresControl not operatingeffectivelyRisk Assessment2021202010Document

24、 Classification:KPMG Confidential 2022 KPMG LLP,a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.Comparison of material

25、weaknesses between Traditional IPOs and IPOs via SPAC for 202146%23%24%25%25%10%11%50%37%34%34%25%13%7%0%10%20%30%40%50%60%Lack of accounting resources and expertiseInadequate/lack of formal policies and proceduresInadequate control design/lack of controlSegregation of duties issueSystems/technology

26、/ITGCRisk AssessmentControl not operating effectivelyTraditional IPOsSPACsThe trends in material weaknesses between traditional IPOs and IPOs via SPAC remain consistent,with lack of accounting resources and expertise being the major material weakness for majority of the firms and risk assessment and

27、 non effective control in operations being the least reported material weakness in both the cases11Document Classification:KPMG Confidential 2022 KPMG LLP,a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG Inter

28、national Limited,a private English company limited by guarantee.All rights reserved.Trends in process areas of SPACs in 2020 and 2021The trends in process area for SPACs from 2020 to 2021 shows that majority of them have witnessed a decline with only“Equity”experiencing an increase of 8%from 2020 to

29、 2021.Financial close/reporting experienced the highest dip of 47%from 2020 to 2021 with tax experiencing a dip of merely 2%(3%in 2020 to 1%in 2021).Business CombinationsFinancial Disclose/ReportingAccounting EstimatesEquitySystemsControl Environment97%50%1%17%17%3%37%25%17%9%17%25%12Document Classi

30、fication:KPMG Confidential 2022 KPMG LLP,a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.Examples of material weaknesse

31、sCommon themes by issueLack of accounting resources and expertise“The material weakness identified relates to lack of sufficient competent financial reporting and accounting personnel with appropriate understanding of U.S.GAAP to design and implement formal period-end financial reporting controls an

32、d procedures to address complex U.S.GAAP technical accounting issues”Systems/technology/ITGC“we did not design and maintain(i)program change management controls to ensure that information technology program and data changes affecting financial IT applications and underlying accounting records are id

33、entified,tested,authorized and implemented appropriately.”Inadequate/lack of formal policies and procedures“The material weaknesses identified relate tothe absence of policies and procedures and related risk mitigations surrounding our IT policies and procedures and the access to system and data.”Ri

34、sk Assessment”we identified a material weakness with our internal controls over financial reporting that resulted from not having a sufficiently documented risk assessment process to identify and analyze risks of misstatement due to error and/or fraud,and not having sufficiently documented complianc

35、e communication and investigation policies.”Inadequate control design/lack of control“.the material weaknesses relate to the ineffective design of controls relating to the review and approval of revenue recognition and journal entries at our less significant subsidiaries and the related ineffective

36、design of risk assessment procedures,deployment of control activities,and monitoring of internal control over financial reporting at these subsidiaries.”Control not operating effectively”The material weakness was due to ineffective controls over the identification of the performance obligations in o

37、ur revenue recognition methodology that resulted in an error where we previously identified a single performance obligation to provide an integrated and enhanced online experience via hosting services performed by the Company over the time period for which the user is estimated to access the Platfor

38、m.”Segregation of duties issue“we did not design and maintain controls and we did not maintain a sufficient complement of accounting personnel to ensure(i)the appropriate segregation of duties in the preparation and review of account reconciliations and journal entries.”Material/numerous audit or YE

39、 adjustments”audit adjustments were made to unbilled revenue upon adoption of ASC 606 Therefore,we have noted a material weakness in internal controls over unbilled revenue.”Source:Audit Analytics MW S-1 data through 12/31/2113Document Classification:KPMG Confidential 2022 KPMG LLP,a Delaware limite

40、d liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.Examples of material weaknesses(continued)Common themes by issueFinancial close/reportin

41、g“The material weaknesses related to a failure to properly design our financial closing and reporting process to record,review and monitor compliance with generally accepted accounting principles for transactions on a timely basis.”Control Environment“We concluded that there were material weaknesses

42、 in the design of our internal control over financial reporting across the principles for each component of the COSO framework at the entity level(i.e.control environment,risk assessment,monitoring,information&communication and control activities).”Non-routine/complex transactions“There were deficie

43、ncies in the design and operations of internal controls over the identification and review of complex accounting issues involving significant judgment or estimates with respect to certain prior period transactions.”Equity“The controls to evaluate the accounting for complex financial instruments,such

44、 as mezzanine and permanent equity,did not operate effectively to appropriately apply the provisions of ASC 480-10-10-S99-3A.”Systems“The lack of information technology general controls over our financial accounting system presents ineffective segregation of duties,change management and program deve

45、lopment in our control environment.”Tax“We did not design and maintain effective controls over the accounting for income taxes over the recording of deferred income taxes and the assessment of the realization of deferred tax assets.”Revenue“The material weakness related to a lack of resources necess

46、ary to operate controls in a timely manner and with sufficient precision,primarily relating to recording revenue,which require greater automation and changes to design so that controls operate with satisfactory precision.”Inventory“we identified material weaknesses in the design and effectiveness of

47、 our internal control over financial reporting related to a lack of appropriately designed inventory processes and systems,inadequate review controls over the classification of certain proceeds received from vendors,and inadequate review of the accounting conclusions relating to our convertible note

48、s.”Source:Audit Analytics MW S-1 data through 12/31/2114Document Classification:KPMG Confidential 2022 KPMG LLP,a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company

49、limited by guarantee.All rights reserved.Key takeawaysFor each of the past five years,26 42 percent of U.S.based,NYSE and NASDAQ traditional IPOs have disclosed material weaknesses in their S-1/S-1A filings.For 2021,60 percent of SPACs disclosed material weaknesses in their S-1/S-1A filings(up from

50、48 percent in 2020),of which fewer were noted as remediated.The root cause of most material weaknesses disclosed in S-1s is a lack of resources with sufficient knowledge to analyze complex transactions for proper accounting treatment,meet reporting requirements of U.S.GAAP,or ensure proper segregati

51、on of duty and review procedures.Material weaknesses are typically the result of control gaps or controls and processes that have not been properly designed,rather than controls that fail to operate.Companies should perform a proper risk assessment including identification of“what could go wrongs”an

52、d ensure controls are designed at an appropriate precision level and performed by competent personnel.Additionally,companies should pay special attention to the identification of“what could go wrongs”and associated controls in non-routine processes/transactions.Companies should not overlook the tech

53、nology aspect of financial reporting.Often systems used by private companies are not able to scale to the requirements of public companies.Additionally,IT general controls and application controls are not properly implemented to ensure financial information is appropriately safeguarded and accuratel

54、y processed.A strong IT team and well-implemented and controlled systems are critical in ensuring internal controls over financial reporting.12345Material weaknesses primarily fall in areas of accounting complexity that require the use of estimates and judgement,such as tax,equity,financial reportin

55、g,accounting estimates,revenue,business combinations and non-routine and complex transactions.Private companies often do not have the in-house expertise and/or resources are stretched too thin to appropriately identify,analyze,and account for complex transactions.During the last two years,2020-2021,

56、it was found that SPAC IPO transactions increased by 340%from 2019 to 2020 and 150%from 2020-2021.While the number of SPAC IPO transactions increased,the gross proceeds from these transactions increased by 513%from 2019-2020 and by only 95%from 2020-2021.Source SPAC Insider YearIPO CountGross Procee

57、ds($mms)Average IPO Size($mms)2021613162,502.7265.1202025883,379.5336.220195913,608.3230.6615Document Classification:KPMG Confidential 2022 KPMG LLP,a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG Internation

58、al Limited,a private English company limited by guarantee.All rights reserved.Lessons learned from prior IPOsStart early:A key success factor for getting a pre-IPO company through SOX compliance is starting early.While timing may vary by company size,structure,number of locations in scope,etc.,it ta

59、kes at least a year or more to get a company through its initial SOX compliance effort.Many pre-IPO companies do not have employees with recent SOX experience and thus tend to discount the effort related to the changing regulatory environment.The burden of leading the SOX compliance effort typically

60、 falls on Accounting and Finance along with other IPO responsibilities that include preparing the S-1 and getting the company through its financial audit.Tone at the top:Getting buy-in from the Executive Management team,including the CEO,CFO,and CIO is essential.Communication that comes directly fro

61、m upper management supporting the SOX effort and reemphasizing this message during strategic meetings/discussions throughout the course of the project helps ensure success.Key employees:Employees that need to provide support or that may be impacted by SOX 404 should be notified prior to kicking-off

62、the project and should receive SOX awareness training.A kick-off meeting with key executives is highly recommended.It is important to explain that SOX is an on-going process rather than a one time project.A successful SOX program requires that employees performing controls take ownership of their ro

63、le in SOX and understand the value in the controls they perform(i.e.,not just a compliance exercise).Dedicate resources:most companies underestimate the number of resources required to successfully navigate through a companys first year of compliance.If the company does not have an established Inter

64、nal Audit Department(which most small pre-IPO companies do not),resource needs should be addressed early by hiring or collaborating with outside consultants.Its also important to dedicate at least one internal resource to lead the project effort and assist with remediation.Cost:Although companies ar

65、e aware that the initial cost of compliance is high,most companies still underestimate this cost.While its difficult to provide exact estimates,drivers such as number and complexity of revenue streams,number of geographical locations,level of automation,etc.can be used to develop an estimate.Risk an

66、d reward:Companies should strive to take a risk-based approach to SOX and consider this exercise as a means to add value and improve processes while achieving an important compliance requirement.16Document Classification:KPMG Confidential 2022 KPMG LLP,a Delaware limited liability partnership and a

67、member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.Lessons learned from prior IPOs(continued)Transition from Private to Public:The transition from being a privately-held

68、 company to a public company can be significant.The additional hurdle of getting the company through SOX 404 compliance makes this process even more challenging.Expect change:Depending on how well the company and its finance and accounting functions are structured,the company may experience slight t

69、o significant change after the completion of its initial documentation and identification of design gaps.Processes with significant design flaws may need to change completely and could take over a year to remediate,especially if the solution requires implementation of new technology/systems.Some lev

70、el of change should be expected throughout the organization.New processes:While existing processes may change,the company will also need to establish new processes as part of being a public company.The external financial reporting process is a good example of a new process that will need to be estab

71、lished and fine tuned prior to going public.Other processes such as budgeting and forecasting need to be revisited to provide accurate guidance to the marketplace.Technology considerations:Companies that have not adequately invested in technology and tools for financial reporting and business operat

72、ions may struggle with technology and system limitations.This may require additional resources to implement new technology/systems or customize existing systems and reports.The IT effort required for SOX compliance should not be underestimated.IT plays a large role within the internal control struct

73、ure and will be an integral part of SOX compliance.Additionally,to the extent possible,companies should consider implementing necessary new systems prior to the IPO.KPMG uses multidisciplinary teams that typically include Internal Audit,IT,and Tax.In addition,subject matter professionals are also in

74、corporated as part of the project team.External auditor:It is important to get external auditors involved early during the process to understand their expectations related to auditor reliance and to get buy-in on scope and timing of the project.Other factors to discuss with the external auditor incl

75、ude:sample size for testing,reliance on testing conducted by internal vs.external resources,and communication protocols.KPMGs experience as an auditor of public companies and in working with other Big Four firms can assist in navigating your discussions with the external auditors.Document Classifica

76、tion:KPMG ConfidentialThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.Although we endeavor to provide accurate and timely information,there can be no guarantee that such information is accurate as of the

77、date it is received or that it will continue to be accurate in the future.No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.2022 KPMG LLP,a Delaware limited liability partnership and a member firm of the KPMG global

78、 organization of independentmember firms affiliated with KPMG International Limited,a private English company limited by guarantee.All rights reserved.The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global usRebecca GreerDirector Advisory ServicesE:W:213-817-3126Susan KingPartner Advisory ServicesE:W:213-955-8399Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.