BusinessCorporate FinanceFollowing through post-IPO

Following through post-IPO

Bad habits are hard to break. But starting as you mean to go on can be a valuable lesson.

So why are the good practices adopted by public companies at flotation discarded thereafter?

When the US sneezed, we all caught Enronitis. The green shoots of the IPO market are struggling in a sceptical climate. In such fragile times, it is imperative that the preparers and auditors of accounts reassure the users.

Any director or adviser involved in a flotation will bear the scars that testify to the work underpinning the prospectus. Completion is followed by a corporate sigh of relief and the papers are bundled away into storage.

But those documents may highlight procedures worth repeating in the future.

For example, each word and number in the prospectus is verified. While this process is about as exciting as bird-watching in the fog, it is significant that every director signs the verification notes. How many companies adopt such a highly symbolic act in approving their annual accounts?

And why not also require every board member to sign the year-end balance sheet, rather than just two representatives? I know that the non-financial directors aren’t supposed to have the in-depth understanding, but isn’t that the point? Ensure they all comprehend the implications and inferences in the accounts; then, if each director puts pen to paper, perhaps the shareholders might have more confidence.

The prospectus spells out the risk factors. The board and advisers go to great lengths to ensure the key risks are communicated. And thereafter, a deafening silence. Why not revisit the risk factors in each year’s accounts?

As to the company’s future viability, all UK prospectuses contain a confirmation on the adequacy of working capital. A rigorous examination by the directors and their advisers supports the statement. However, do all boards undertake such a formalised procedure each year to support the going concern assumption?

Whilst the process at flotation involves an element of theatre, it does concentrate the mind.

And finally, the plans for corporate governance.

If the all-powerful institutions and investment banks really believe that good housekeeping is associated with quality earnings, they have the influence to keep the companies in line. Now that really would be a habit to benefit us all.

  • Ian Smart is a member of the ICAEW corporate finance faculty and head of corporate finance at Grant Thornton

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