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Wednesday, 31 January 2007 19:00

Value through audit synergies

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Under Sarbanes-Oxley (SOX), CEOs and CFOs of public companies are accountable for assessing the integrity of the company’s financial and information technology controls as well as certifying to the fair presentation of the financial statements. While an increasing percentage of data used in compiling financial statements is captured, processed and stored in the company’s information technology

system, most IT audits are conducted independently from the financial audit, leaving potential gaps in the control systems. Coordination of audits may ensure that compensating controls are in place. Coordinated audits can detect situations where “super users” have universal access to the system or administrators independently set up and manage the security and permission levels for the operating systems, applications and network, thus creating an opportunity for collusion, fraud or confidentiality breaches, says Robert Greene, IT Audit Practice leader with Haskell & White LLP. “The CEO needs to understand that IT controls can complement financial controls. When these combined controls are understood and implemented, there is a greater assurance of the integrity of the financial statements and source data,” says Greene.

Smart Business spoke with Greene about how CEOs can create tighter controls by combining the IT and financial audit processes.

Why is there a tendency to separate the IT and financial audits?

Historically, CPAs did all of the auditing and the IT systems were not audited. Now, more and more data used by finance and accounting comes from IT applications, and the audit planning hasn’t necessarily kept up. The CPA usually has no IT audit experience and the audits are planned separately. IT audits primarily are focused on strategies to protect the firm’s data capabilities — not necessarily the financial statements. The CFO and CIO need to understand how IT and finance controls are interdependent; to create controls that will be effective for both.

What is the value of combining the two audits?

First, by understanding who creates and has access to the data, controls can be established that ensure both the integrity of the data and the manual processes that occur independently from the IT system.

For example, the company may have a manual control process that calls for the controller to approve any check exceeding $10,000. The CIO may not be aware of the process, and the software could be programmed to flag any entry that exceeds $10,000 when it is created. In this case, the new primary control would be the exception report generated by the system, the compensating control would be a review of an exceptions report by the controller, and the fail safe is a manual review of all checks over $10,000. This additional capability will allow the CFO to know how many checks should be coming through the manual review process and the CEO could also receive a copy of the report. Having the CIO and the CFO collaborate in creating controls will reduce gaps in both systems.

Second, when the entire team works together, it creates synergistic opportunities to advance the company’s mission and business plan, which fosters growth.

Third, by knowing that the controls in IT and finance work cohesively, the CEO and the board can have greater confidence in the effectiveness of the control system and the accuracy of financial statements.

How should the IT and finance audit teams work together, and what information should they share?

The finance audit team usually makes up the audit schedule. IT should be involved in planning to ensure it knows the time frame and how much time to allocate. The two audit teams should share any concerns in advance, to help stimulate both ideas and solutions. Generally, IT doesn’t understand the financial processes and finance doesn’t understand the IT controls. Therefore, the opportunity to design or recommend complementing controls may be missed.

Jointly, both parties should look at the entire flow of data from creating users in the system, to entering information, processing information and who has access to the information. This process mapping will reveal gaps, as well as opportunities to jointly author process controls and safeguards.

What are the best practices to achieve the optimum results from a combined audit?

First, IT and finance should author the audit plan together. They should talk about what is important to both sides and collaborate on the scope of the audit and the audit program.

Second, the CEO should insure that the budget is sufficient to conduct a thorough, combined audit.

Third, by integrating the process and control training to include both the IT and finance auditors, as well as the respective leadership teams, each group will be able to understand each other’s needs and see the value in combining the audits.

ROBERT GREENE is the IT Audit Practice leader with Haskell & White LLP. Reach him at rgreene@hwcpa.com or (949) 450-6340.

Sunday, 31 December 2006 19:00

Reaching out

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Good CEOs know when to reach outside their own circle for guidance, says Melinda Masson, founder and CEO of The Merit Cos. Masson and her management team did just that as they sought outside consultants to help find an appropriate business model for her company.

“We utilized a group to help us understand what this business is,” says Masson, the company’s founder and CEO. “It didn’t have the big flash in the pan, the quick hit that a lot of the other Web site companies did. But we sustained and the other ones did not.”

The company, which provides professional community association services, was founded by Masson in 1980 and now has 410 employees and 2005 revenue totaling $34 million, up from $27.8 million in 2004.

Smart Business spoke with Masson about how she finds good employees and the importance of occasionally pausing.

What skills must a good CEO possess?
Knowing where the company is going is many times more important to the CEO than where we’re currently at.

There are lots of opportunities that come in every single day. Know what your core business is and what opportunities make sense to add to your business. You can really take a side turn and end up down the wrong path if you’re not careful.

I’m very strategic in terms of how I guide and lead the company. I’m also very passionate. As a result, I probably have a tendency to be an influencer. At the same time, I’m accountable in that I do not ask people to accomplish things that I myself would not also be willing to do.

Always be listening. There are times when you just want to shoot from the hip and just go for it. We are so driven, we are so visionary and focused that we get impatient with the process. It’s extremely important for me to surround myself with those people that are very strong and good operationally and consistent at saying to me, ‘Melinda, we need to pause on this.’

You have to be able to establish and manage priorities. You have to always show respect and build trust not only with your employees but with your clients. You have to deliver financial performance.

What is your leadership style?
The most effective leader is one who seeks to serve versus one who is seeking personal empowerment. When you’re a CEO, you can look at a CEO as one who has incredible power, or you can see a CEO as one who has incredible opportunity to empower.

As one starts out, it’s a very lonely walk when you accept a role of a CEO. There’s a lot of responsibility and a lot of accountability. The CEOs who continue to empower their people within their companies are the ones who are really successful. It’s servant leadership. A very successful CEO recognizes very early that serving is what it’s truly all about.

How do you work through challenging situations?
In our core values, we really embrace a culture of learning. It’s constantly being willing to learn how to listen differently, how to deal with conflict and how to handle confrontation. There is a lot of role-modeling.

Having adults feel comfortable with asking questions and using other people to help them solve a problem is the center of our leadership style. When we have a difficult situation, it’s a company norm that they can pull in whomever they need to help them address or solve the problem.

We’re also a culture that spends time celebrating. I think as adults, we lose sight of having fun. We lose sight of how important it really is to not only be told that you’ve done a good job but also for someone to tell someone else, ‘Way to go, great job.’ That’s really important to me.

How do you deal with failure?
My father gave me advice on this when I started the company years ago. He said, ‘Melinda, there are no failures in life, there are only detours with great opportunities.’ So that’s been my guiding principle. I don’t look at failures. I just look at something as a detour, and then I seek out the opportunity.

We’re always learning, which means that we’re comfortable with one another making mistakes. The mistakes then create the opportunity to learn to do something better the next time.

The most important part is that you pause, acknowledge and then look for the opportunity. It’s a matter of, as a CEO, giving permission to your staff to say, ‘We need a time-out and we’ve got to figure this thing out before we take it any further.’

If you’re just pausing, sometimes that can be a way to just hide by not wanting to confront or deal with the issue.

There are times as a CEO when you have to say, ‘You don’t have time to pause. Make it work to the best of your ability.’

HOW TO REACH: The Merit Cos., www.meritpm.com

Saturday, 30 September 2006 20:00

Checks and balances

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The ability to prevent fraud is crucial when competing in a competitive marketplace. Check fraud, in particular, can have a major impact on a company’s bottom line. Certainly, the use of ACH (Automated Clearing House) transactions to transfer and process electronic funds is on the rise. According to the Electronic Payments Association, 14 billion payments were made in 2005 through the nationwide ACH network, an increase of approximately 16 percent over 2004.

Safeguarding against check fraud — both traditional and electronic — requires diligence and determination, but new technologies are making the process simpler and more cost-effective.
“Financial institutions offer tools that allow customers to protect their assets for a relatively low cost,” says Lynnell Harris, senior vice president of Comerica Bank. “It’s very much a win-win situation.”

Smart Business spoke with Harris about methods that can be used to help prevent check fraud, the benefits of Positive Pay and what distinguishes ACH Positive Pay from other fraud-protection products in the marketplace.

What types of companies are most susceptible to check fraud?

All types of companies. In today’s environment, anyone who sends out checks or transacts business with partners or consumers is subject to fraud and should take precautions. Companies across America, regardless of their size, are at risk.

What are some methods that companies can utilize to help prevent fraud?

There are a variety of safety measures and financial tools. For example, employees can help protect sensitive information by making sure items such as checks, account numbers, bank statements and other sensitive financial information are locked up and stored away. A system of checks and balances can be employed within the company to ensure appropriate access and approval authority.
In today’s environment, electronic transfers offer more control, as systems enable companies to set up various layers of authority based on dollar amounts or transaction types. Other tools include online account review and Positive Pay.

How does Positive Pay work?

Essentially, the bank delivers information to the customer regarding checks or ACH transactions that will be posted against his or her account. The customer then has the opportunity to review the information and determine if they are valid items. The customer authorizes the posting of the transactions and notes any unauthorized transactions. When notification is returned to the bank prior to the deadline, unauthorized transactions are returned to the depositing/originating financial institution.
Tools such as Positive Pay significantly mitigate risk for the company without requiring a huge investment in technology.

How can a business utilize ACH Positive Pay to accept or reject ACH transactions before they are posted?

In a manner similar to checks, the bank will present to the customer, before posting, all ACH transactions. The customer then has the opportunity to identify any unauthorized ACH activity. The customer authorizes the posting of the transactions and notes any unauthorized items prior to the notification deadline. The bank will return those items before posting to the customer account.

What distinguishes the ACH Positive Pay service from other fraud protection products?

Solutions that enable a business to protect and control electronic activity on its accounts isn’t commonplace. Debit blocking provides one level of protection but doesn't offer the full range of decisions that true ACH Positive Pay solutions do. By reviewing and making decisions on all ACH activity before it posts to the account, ACH Positive Pay offers a greater degree of control and information management.

If a business detects suspect items using either Positive Pay or ACH Positive Pay, what course of action can it take?

The first step would be to contact its financial institution prior to the Positive Pay notification deadline and advise which items should be returned. Typically, the information regarding suspect items is available first thing in the morning. Customers pull information electronically, review it and authorize payment of the valid items. If there is an unauthorized item, they would notify their bank in that response. The bank would then return those unauthorized transactions before they post to the customer’s account.

LYNNELL HARRIS is senior vice president of Comerica Bank. Reach her at (714) 424-3895 or lvharris@comerica.com.

Wednesday, 29 November 2006 19:23

Retirement services_pdf

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Friday, 24 November 2006 19:00

The Viviano file

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Birthplace: Los Angeles

Education: University of California, Los Angeles; master’s degree, public administration — public health, University of California, Santa Barbara First job: Orange County Health Department administrative analyst Whom do you admire most in business and why?

Rob O’Leary, former CEO for St. Joseph Health System, VHA, AMI and Premier, was the most inspiring leader and the most brilliant strategist I have ever worked with. He was intellectually gifted and demanded top performance from his team.

What is the most important business lesson you’ve learned?

The creation of a top-performing, complementary team is essential to success. The right strategy, accompanied by a strong team and the presence of a favorable debt structure, is the foundation.

What has been your toughest business challenge?

Sustaining growth in a market where reimbursement is under pressure.

Describe your leadership style.

Motivational and inspirational.

Thursday, 26 October 2006 02:17

Preventive cardiac care

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Each year, more than 700,000 Americans will have their first heart attack and 500,000 will have a repeat episode, according to the statistics on the Web site of the American Heart Association.

CEOs often represent the demographic group at the greatest risk for heart attacks because 49 percent of males will develop coronary heart disease after age 40, as will 32 percent of females. While diet, exercise, quitting smoking and stress management can help to reduce the chances of developing coronary heart disease, new technology has been developed that helps find potential problems and fix them before a heart attack actually occurs.

More than 60 percent of the people who come into the emergency room during a heart attack have never had any previous symptoms, says Dr. Oscar Matthews, medical director of the Cardiac Cath Lab at the Western Medical Center, Anaheim.

Smart Business spoke with Matthews about the best way for CEOs to insure cardiac health through lifestyle and a pro-active testing regimen.

What are the best ways for CEOs to prevent heart disease?
Due to the nature of their jobs, CEOs often have the opportunity to eat frequent meals that can be higher in fat and calories. I always advise eating slowly and taking small bites. This helps ‘fool the brain’ into thinking that your stomach is actually fuller than it really is, so it is important not to rush through meals. Also, stress reduction is very important for executives. You need to set aside time for relaxation which is accompanied by positive imaging and doesn’t include thoughts about work or pending business deals.

What types of diagnostic testing are available to help spot heart disease in its early stages?
One of the basic tests is the treadmill. The executive is connected to a monitor while walking on a treadmill. These types of tests have been around for awhile, but electrocardiogram tests alone are less than 60 percent effective in diagnosing coronary heart disease.

What is nuclear testing and how is it used?
We inject isotopes into the patient’s vein during a session of rigorous exercise. We are able to capture sophisticated images of the heart and the cardiac muscle as the isotope passes through the bloodstream and lodges in the cardiac chamber. The images are then analyzed for potential defects.

A normal cardiac muscle almost resembles a doughnut. If part of the muscle is not receiving a good supply of blood during the test, we will be able to see it in the image because a portion of the muscle will appear to be missing — almost as if someone has taken a bite out of the doughnut.

What happens if the test reveals problems?
If the imaging reveals potential blockages in the arteries, a coronary angiogram can be conducted to determine the extent of the blockage. A small puncture is made in the groin and using a catheter as fine as a hair, we advance into the chambers of the heart and the coronary arteries. There we inject contrast media (dye) from the catheter and illuminate the coronary arteries of the heart for imaging.

If we find that the arteries are less than 50 percent blocked, we normally recommend behavior modification and send the patient home and continue to monitor their progress annually.

If we find that the arteries are between 51 to 70 percent blocked, this is a gray area and one that can be difficult to diagnose. In these cases, we recommend an intervention to evaluate the lesions by performing an endovascular ultrasound that utilizes highly sophisticated equipment. Due to tissue characterization, some of these lesions may require the implantation of a stent which is also required to repair blockages in larger arteries or in cases where the artery is more than 70 percent blocked. The stent is a device that helps hold the artery open and prevents it from re-closing. We place a sealer on the groin after the procedure and most patients are able to go home in three hours.

How often should CEOs be tested?
Executives should plan on being tested every two years after the age of 40, especially if you are overweight, smoke or have other high-risk factors. The test should be conducted using state-of-the-art equipment and should be read by an expert in nuclear cardiology, both of which are available here at Western Medical Center. This type of testing improves the level of diagnostic accuracy up to 90 percent.

OSCAR MATTHEWS, M.D., is medical director of the Cardiac Cath Lab at the Western Medical Center in Anaheim. Reach him at oscardiomat@yahoo.com. For more information about Western Medical Center Anaheim, go to the Web sites www.westernmedanaheim.com and www.theheartinstitute@ihhioc.com.

Thursday, 26 October 2006 02:06

Are captives for you?

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Faced with an increasingly challenging insurance marketplace and unpredictability of where a company’s next large loss may come from, some companies are seeking alternatives other than traditional insurance to transfer risk.

“Captive insurance companies (“captives”) are one of the current trends suggested as an option to provide insurance coverage in these situations,” says Michael J. Perry, vice president of DLD Insurance Brokers Inc.

Smart Business talked with Perry for more information on captives and the advantages and disadvantages companies should consider.

What is a captive?
A captive is a specific-purpose entity set up to operate as an insurance company. The form of the captive is generally classified by its ownership; it may be owned and controlled by a single parent, by a group of companies or by an association. Captives are seen as an alternative to buying insurance from a traditional insurance company.

Why do companies purchase insurance through a captive?
For the most part, captives become more popular when traditional insurance is either too cost-prohibitive or entirely unavailable. Some companies use the captive to purchase reinsurance directly so they may obtain additional savings on their premium, while others use it to accelerate the tax deductibility of their retained losses. The decision to set up or participate in a captive should be considered long term and not taken lightly.

What types of insurance are commonly purchased through captives?
Captives were originally used to insure tough-to-place product liability insurance. Over the years, this has evolved into a creative vehicle for providing insurance covering most types of insurance, including but not limited to workers’ compensation, general liability, auto liability, employee benefits, property, earthquake, flood, warehouse, legal, and even warranties.

What determines the structure of a captive?
There are many variables that go into the ways a captive is structured. Many homogeneous groups — for example, manufacturers of a similar product — may gather to share in the purchase of insurance to obtain competitive rates through greater economies of scale. These are called group captives. Some companies do not want to share the risk of others, so they may set up a single-parent captive or a segregated-cell captive.

How do companies determine if a captive is the right decision?
The first thing you should do is speak with your insurance broker about your motivations for considering a captive. In most situations, captives are not a tool for immediate savings due to the up-front costs associated with setting up the captive.

Once your broker has done this ‘sanity check’ and detailed the future costs associated with setting up a captive, he or she should be able to assist you in hiring an independent consultant to do a feasibility study. That will help you to determine the return on investment of a captive versus other risk transfer mechanisms, taking into account various factors such as captive structure, domicile, and your own internal rate of return.

Why, in past years, are so many captives set up outside the continental United States?
When captives were initially introduced as an accepted financial mechanism for insurance, the ‘inventors’ were utilizing the relaxed insurance regulations and tax advantages of some offshore domiciles. Domestic captives popularity rose since the passage of the 1986 Tax Reform Act eliminated the ability to shelter off-shore income until it was repatriated on shore. In addition, insurance and accounting regulations were tightened requiring the increase for the credibility of the risk transfer. However, it should be noted that the support from the IRS has accelerated clarifying tax deductibility based upon the brother/sister structures. Recently, many states in the U.S. began adopting captive domicile status to be able to regain some of the lost premium tax income.

What warnings would you give to people considering a captive as an alternative to traditional insurance?
Do not take this step without reviewing it seriously. Many people think that captives will automatically help them save money due to the acceleration of tax deductibility or that they can charge themselves less premium than the traditional marketplace. Tax deductibility should only be determined after tax counsel advice. The underwriting of the risks should be actuarially determined and premiums should be set to reflect the retained exposure.

It is critical that premiums paid in the early years of the captive adequately fund losses. Savings of premiums may occur over a five- to 10-year period as earnings are built up. More important than savings is the fact that a risk management tool is in place to be used to address cycles of the insurance markets and potentially to insure risks that are traditionally uninsurable.

MICHAEL J. PERRY, CPCU, ARM, is vice president of DLD Insurance Brokers Inc. Reach him at (949) 553-5686 of mperry@dldins.com.

Wednesday, 25 October 2006 13:23

The value of persistence

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When the temptation to sell out during financially challenging times presented itself, Joel Moskowitz, chairman president and CEO of Ceradyne, resisted because he was convinced that the company would survive and the technology would fulfill its promise.

“In the late 1980s, Ceradyne was struggling to achieve profitability, and we had suitors knocking on our door who were interested in exploring the possibility of buying Ceradyne,” says Moskowitz. “I always felt that the stock price was not reflecting the intrinsic value of our technology and represented to potential buyers that we would not be interested unless the offer recognized our future.”

Moskowitz’s commitment to the company paid off in another case, as well, when the company got a lowball offer for one of its business units.

“One particular competitor of Ceradyne was very interested in buying our Thermo Materials operation in Atlanta, Ga.,” says Moskowitz. “Again, because of our financial difficulties, they made an offer that I felt was inadequate, and nothing came of it. This same operation in Atlanta, Ga., has been profitable for a number of years and is directly responsible for the new plant that we are building in Tianjin, China.”

Through much of its existence, Ceradyne made steady but modest growth gains, despite the huge promise that Moskowitz saw in its core technology. During much of that phase, the company was involved heavily in research and development and didn’t turn solidly into the black until the early 1990s. Its largest line of business, personal body armor, took decades to develop into Ceradyne’s flagship product.

But the end result is a company that expects to hit $600 million in revenue this year.

Thursday, 21 September 2006 10:11

Strategic planning is key

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With office space at a premium and no signs of a softening market, strategic planning has become critical to companies wishing to lease or purchase a new building. And the sooner the process begins, the better.

“Tenants should be prepared to strike a deal with a landlord or seller far in advance of their projected timing goals,” says Wes Hunnicutt, vice president of CRESA Partners, a corporate real estate service adviser. “Many times, when faced with this scenario, an impulse decision is made without the proper planning and thought process required to make the most educated and important business decision. This places the tenant/buyer at great risk for inefficiencies in the space, building and workflow.”

Smart Business spoke with Hunnicutt about the importance of strategic planning and when the process should begin.

Why is strategic planning important?
In this market, with vacancy rates reaching an all-time low of 6.7 percent for Class A office space, it is critical that tenants begin evaluating their business and surface the internal business factors that are driving their real estate needs. With little space coming on line within the next 18 to 24 months, a softening of the market is not in the foreseeable future. A company’s real estate service provider should be pro-active and intimately understand the company’s direction as it relates to lease expirations, market inventory, and expansion or contraction goals, along with other important key factors.

How will strategic planning shape a company’s future occupancy?
A company should look to its real estate service provider to perform services that extend far beyond surveys, market information, tours and proposals. The companies of today are faced with making difficult assumptions on ‘where the market is heading.’

Professionals providing real estate services can begin evaluating a company’s efficiency in layout, specific placement in product type, and overall company workflow — all factors that shape occupancy costs.

This strategic evaluation typically takes place one to two years in advance of any lease expiration. This exercise with the real estate professional and the company will produce the company’s current and future projections for its specific space needs.

Why is it important to begin the process so far in advance?
As vacancy rates and available buildings decline, fewer options are introduced to the market. Larger users of space are typically more impacted due to the already minimal alternatives.

Tenants should be prepared to strike a deal with a landlord/seller far in advance of their projected timing goals. Many times, when faced with this scenario, an impulse decision is made without the proper planning and thought process required to make the most educated and important business decision. This places the tenant/buyer at great risk for inefficiencies in the space, building and workflow. It is essential to have conducted this exercise prior to any consideration of evaluating the market. This will ultimately reduce variation and improve the quality of the process.

Does strategic planning solely emphasize on the amount of space a company should occupy?
Strategic planning will emphasize many different characteristics of an organization. It is oriented toward the future, and focuses on the anticipated future of the organization. The premise is based on the analysis of foreseen and predictable trends, as well as the analysis of internal and external factors that shape the company’s real estate.

Strategic planning will not only shape and define the future real estate goals in an efficient form, but will align an organization with its environment. This will provide a framework and direction to achieve the organization’s desired future.

When strategic planning is most successful, it will influence all areas of operations, becoming a part of the organization’s philosophy and culture.

What would be the first step for an organization to begin this process of strategic planning?
The organization should interview different real estate service providers that are familiar and capable of establishing a comprehensive approach to strategic planning. Once the organization has selected a preferred service provider, the real estate team should become intimate and fully understand the companies’ business goals and objectives. An effective strategic plan develops a real estate model that supports and connects the real estate objectives to the corporate business plan. The organization and real estate service provider will then collectively work together to establish goals and objectives that are important to the company. The strategic planning phase is a process and not an event.

WES HUNNICUTT is vice president of CRESA Partners, specializing in the acquisition and disposition of space on behalf of office and industrial users. Reach him at (949) 706-6600.

Wednesday, 20 September 2006 20:00

Going public

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It has never been considered easy for private companies to sell a piece of their business to the general public. Numerous regulatory steps are involved, and immense financial obligations may be required. Since 2002, more regulations have caused companies to take a closer look at “going public.”

Wayne Pinnell, CPA and managing partner of Haskell & White LLP, reports that even with the increased regulatory environment, more companies filed initial public offerings during the first half of 2006 than in 2005. “Part of this increase, I believe, is because business owners are starting to become more comfortable with the regulatory environment, and have grown more assured with a stronger economy this past year, as compared to the previous year,” Pinnell says.

Smart Business spoke to Pinnell to cover the primary steps of going public, and why it is vital for business owners to carefully take this major step into the unknown.

What does a company gain by going public?
The first reason, of course, is to raise equity, which allows the company to have another source of financing beyond the money it raises in its initial public offering. As a public company, the business can use more freely tradable securities as a form of currency to conduct other transactions. For example, once public, a company can utilize its stock book, instead of only a checkbook, to spur growth by buying other companies.

The second reason is related to the succession or an ownership transition plan. Founders of the business can cash out and move on to future endeavors.

What preparations should be made?
One key preparation is for the founders to align themselves with key advisers, including legal, accounting and investment banking, at a minimum. The company also will need to secure an underwriter to complete the public offering. The key is starting early.

At the base level, a company must have at least two to three years of audited financial statements. The registration statement itself includes a prospectus, and in order to prepare that prospectus, a great deal of information gathering must be done among the legal and accounting professionals, as well as the underwriter and its counsel.

What is the lead time needed to go public, and what are the cost factors?
At least six months — and it could be more or less depending on the company’s state of preparation. Companies should consider that underwriting commissions and expenses range from eight to 12 percent of the offering proceeds, plus several hundred thousand dollars in accounting, legal and printing costs.

Business owners need to gauge how much they need to raise, and balance that against how much of the company they are willing to sell.

How has the rate of companies going public changed in recent years?
After the dot-com era, the IPO market cooled off for a period. When SOX (Sarbanes-Oxley Act) took effect in 2002, there was another cooling effect for companies going public. In fact, executives of public companies began to question whether they should remain public because of the new regulatory burdens.

Is going public now more difficult with the Sarbanes-Oxley Act?
Yes, there are strict rules for the functioning of audit committees, accounting firm requirements and, of course, internal controls over financial reporting. The internal control aspect has caused extensive work for companies, requiring internal and external resources to document and test their internal controls as required by SOX. A company is required to have this documentation and testing in place so the auditor can then test that information and include those reports in the public filings made after completing the IPO.

Private companies anticipating going public should be wary of pitfalls, including greater lead time, the extent of documentation needed, and judgment about the quality of the documents from an internal and external standpoint. If companies just barely comply with SOX’s Section 404, they will miss potential benefits, such as tightening controls over the business, streamlining operations by eliminating redundancies, and providing a higher level of assurance to investors and potential investors that the company is, indeed, taking the right steps.

What about a reverse transaction: Are public companies going private?
It certainly is one trend we see today. Some companies view the cost/benefit of staying public in the heightened regulatory environment as a lose-lose proposition and are pursuing ‘going private’ transactions, mergers or other steps to eliminate their regulatory requirements.

WAYNE R. PINNELL, CPA, is managing partner of Haskell & White LLP in Irvine. One of the largest independently owned accounting and business advisory firms in Orange County, Haskell & White provides a full complement of tax, accounting and auditing services to public and private middle-market companies. Reach Pinnell at (949) 450-6200.