Dive Brief:

• The number of companies restating results or revealing accounting flaws surged more than 150% during the 2023 proxy season, demanding extra scrutiny from company directors overseeing audits, Glass Lewis said in a report.  
• “Problematic accounting and poor internal control over financial reporting at companies has put a strain on audit committees,” Glass Lewis said in the “2023 Proxy Season Briefing” based on analysis of 4,680 reports from companies that held an annual meeting from January through June.
• The number of accounting errors rose after a record number of businesses went public early this decade either as a special purpose acquisition company or as a conventional initial public offering, Glass Lewis said. Many of the companies are “in the early stages of developing strong internal controls.”

Dive Insight:

The number of IPOs in the U.S. soared to a record 1,035 in 2021 from just 232 in 2019, according to Statista, as hundreds of SPACS, or “blank-check companies,” secured financing.

A SPAC has been perceived to be a faster, cheaper way to raise money than through a conventional IPO. It sells shares listed on a stock exchange and then merges with a private company, usually within two years, in a so-called de-SPAC transaction.

The number of U.S. IPOs plummeted last year to just 181 because of regulatory scrutiny, compliance challenges, a downturn in the global economy and challenges securing adequate valuation.

During the first half of this year, U.S. IPOs raised $8.8 billion, an 87% jump compared with the same period in 2022 but only about one-tenth the $84.2 billion surge in IPO proceeds during the first six months of 2021, EY said. During the first half of last year, U.S. IPOs raised a paltry $4.7 billion.

The SPAC market collapsed during the first six months of this year, EY said, with the total number of transactions falling to 32, a 70% decline compared with the first half of last year, EY said. Proceeds during the same period fell to $2.7 billion from $14.7 billion, an 82% slump.

Accounting flaws at SPACS have sapped investor enthusiasm. Restatements by all categories of companies soared to 1,470 in 2021 compared with the prior year, a 289% increase, according to Audit Analytics. Excluding SPACs, though, restatements would have fallen 10%.

Newer companies, whether funded via a SPAC or conventional IPO, are more prone to the mistakes and oversights that lead to restatements, according to Deloitte.

“While internal control issues can affect any company, newly public companies tend to be more susceptible to internal control weaknesses,” according to Deloitte.

“These organizations are often still refining their internal controls, putting additional controls in place, establishing accounting policies, assembling their teams and considering or implementing technology solutions,” Deloitte said in a report on restatements.

Deloitte analyzed SEC filings since 2020 and found that newly public companies tended to restate because of errors in five areas: revenue recognition, deferred tax assets and liabilities, leases, equity awards and earnings per share.