40 Accounting & Auditing As discussed in Chapter 3, the Exchanges advise companies preparing to go public to start preparing financial statements as early as possible. In fact, because of the extensive audit requirements, many companies choose to establish a relationship with a public accounting firm early in their development and have annual audits performed, even if there’s no specific requirement to do so. That way, when the decision to go public is made, audited financial statements and quarterly results are already available. Regardless of what your company is or isn’t already doing, it’s a good idea to start looking at auditing requirements as soon as you can. A company would be advised to not delay auditing matters until the time the Listing Document is being prepared for several reasons: Not always feasible – If your company has significant inventories, auditors will generally need to observe and test the annual physical inventory counts to issue a “clean” opinion for each of the years under audit. This cannot be done after the fact, except possibly by a costly audit of a “roll back” of a current physical inventory. Unexpected audit results – Income results and trends may not be what you’re expecting and may lead your company, or your underwriters, to cancel or delay the IPO or listing. But since you’re already deep into preparation for your listing, your company has already incurred substantial, unrecoverable costs. Potential further delays – An audit covering two or three years is time-consuming and could delay the listing process by several months. A few months’ delay could mean missing the best opportunity to go public. Accounting principles Another reason to get a jump on preparing your financial statements is that, as an international company looking to list in Canada, you’ll need to ensure your financial statements are prepared in accordance with Canadian regulations. In some cases, this will simply mean reconciling the principles you are using to Canadian Generally Accepted Accounting Principles (GAAP), but in other cases the situation will be more complicated. National Instrument 52-107 lays out the acceptable accounting principles, auditing standards and reporting currency for all public companies listed in Canada, including non-Canadian companies. Under NI 52-107, the acceptable accounting principles for use in preparing interim and annual financial statements are: • Canadian GAAP • U.S. GAAP if your company is an SEC Foreign Issuer • Principles that meet the disclosure requirements for foreign private issuers if: • your company is an SEC Foreign Issuer, and • less than 10% of your company’s total equity securities are owned by Canadian residents (as of the beginning of the most recent interim period for which operating results are included in the financial statements being prepared). • Principles that meet the disclosure requirements of your home jurisdiction, if your company is a Designated Foreign Issuer • Principles that cover substantially the same core subject matter as Canadian GAAP, including recognition and measurement principles and disclosure requirements, as long as the notes to the financial statements: • explain the nature of material differences, between Canadian GAAP and the accounting used, that relate to measurement in your financial statements; • quantify the effect of material differences, between Canadian GAAP and the principles used, that relate to measurement in your financial statements; and • provide disclosure consistent with Canadian GAAP requirements, to the extent not already reflected in the financial statements.
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