TheCorporateCounsel.net

According to this recent Audit Analytics blog,  the number of IPOs in which issuers disclose that their internal control over financial reporting is ineffective has risen sharply in recent years. In 2011, less than 5% of all IPOs disclosed ineffective ICFR, by 2018, that number had risen to nearly 25%.  A related Audit Analytics report on IPO risk governance sheds some light on why investors may be more tolerant of IPO companies with significant control issues. At the risk of sounding like Ari Melber again, this excerpt suggests that it’s “All About The Benjamins”:

Having systems in place to assess internal controls over financial reporting and attest to the reliability of ICFR would seem to benefit investors, if only to signal that internal controls and accounting quality are a high priority for management. However, research surrounding this value proposition provides mixed results.

According to a 2016 study, firms that do not comply with SOX 404 at the time of IPO exhibit the least underpricing and exhibit the highest levels of post-IPO performance over the six- and twelve-month performance periods. Further, the researchers found that companies that were not SOX-compliant IPOs had substantially greater median buy and hold returns over the 24 months following the IPO.

The report did note that the companies achieving the highest buy & hold returns over the 24 months following the IPO were those that didn’t cite ICFR effectiveness issues.

– John Jenkins