Most people are shocked to find out that Certified Public Accountants do more than just tax compliance. dbbmckennon is a full service CPA firm in which provides other services including audits of private and public companies. Individuals within our firm in which perform these services are referred to as "auditors". Most people when they hear that you are an "auditor" automatically associate you with bad things, such as an IRS auditor. What most people don't realize, is that we are the type of auditor in which is there to protect them and their investments. Most auditors have a difficult time explaining to the friends and family what they actually do. If you find yourself not quite grasping what an auditor does, the Center for Audit Quality has created a short video explaining such. You can find the video here. For additional complimentary information regarding our services or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact here.
Five Accounting Resolutions for 2013
Improving your company should be a constant effort. Here are fie resolutions to make for 2013 to improve your company's accounting and business.
- Outsource the work that doesn't benefit your top or bottom line – Business owners should not spend one, two, three or four or more hours a day doing administrative work that doesn't directly impact the company’s growth and future. Business owners are the face of the company and shouldn't spend all their time behind a computer and a stack of paper. Outsource the accounting work to a qualified accountant that can take over receivables, payables, and general oversight of the company’s accounting needs. Use a payroll company that can also help you with HR related issues. Don’t try to wear all the hats in the organization.
- Review – Create a monthly or quarterly review process. Review margins, receivables, payables, and cash forecasts. Sometimes business owners aren't as profitable as they think they are. You may get a great margin on a sale, but are you thinking about your overhead costs, how long the product sat on the shelf, etc? Are your prices to low/high? Your product/service may need price adjustments. Reviewing these items regularly will ensure your company doesn't fall behind needlessly.
- Automate – As your business expands, make sure that efficiencies are found where available. Credit card processing, storing bank information for clients, or automating payments can assist in becoming more efficient. Upgrading your accounting software or billing practices can also help.
- Plan – Speak with your CPA a few times throughout the year not just at year end. Planning with your CPA can help minimize taxes. Planning expenditures, creating retirement plans, and taking advantage of certain deductions can all help minimize taxes.
- Take action – Most resolutions never get off the ground. Make a concerted effort to do at least one thing that will help your accounting in 2013. The first step is usually the hardest!
dbbmckennon is a full service CPA firm with offices in Orange County and San Diego focused on providing quality accounting and consulting services at reasonable rates. For additional complimentary information regarding this topic or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.
2011 Tax Filing Deadline Extended to April 17, 2012
Tax Day is typically April 15, but this year the IRS has moved the filing deadline to Tuesday due to April 15 falling on a Sunday and Monday being Emancipation Day, a District of Columbia celebrated holiday. Tax payers may start submitting their 2011 tax returns beginning January 17, 2012. Filing electronically is the fastest and most reliable way for taxpayers to file returns. Although April 17, 2012 is the deadline this year, taxpayers should contact their preparers early to plan ahead. Those taxpayers needing a little extra time will still be required to file an extension will have until October 15, 2012 to file. PS - We tax preparers just love when April 15th land on a weekend as it gives us a couple of extra days to complete client returns.
For additional complimentary information regarding this item or other questions you may have please call one of dbbmckennon‘s offices located in Southern California or contact us here.
Small Business’ Outgrowing their Accounting System
Small business owners are constantly presented with decisions of whether or not to make investments in property and equipment in order to maintain growth within their businesses. Often decisions are easy as the investment is minimal and will quickly contribute to additional revenue. However, there is one asset that every Company has but virtually no Company wants to invest in: an accounting system.
Start-up and small developing businesses often use an off the shelf accounting system (i.e. QuickBooks, Peachtree, etc). As their business grows, sometimes so do the demands of the accounting department. At some point in the Company’s growth, the chief decision maker often has to consider whether to stick with the status quo, or invest in a new Enterprise Resource Planning system, commonly referred to as an "ERP" system. However, implementing an ERP system isn’t just about cost, it’s also about time and timing. So the real question is, should a Company implement an ERP system in the preparation of additional growth, or after growth has been achieved and the old accounting system has reached its limits?
While there is no one size fits all answer, here are a few questions that can assist in the decision of whether or not to upgrade your accounting system:
- Are cash flows from operations substantial enough to support the cost of implementation?
- Will forecasted growth in the coming years substantiate the need for a more advanced system?
- Will an integrated system provide for better customer service?
- Is the business in an industry that generally requires a more advanced system?
- Are there frequent errors in financial reporting, and if so, are those errors arising from the current accounting system not being able to meet the needs of the Company?
- Are there any contracts or large projects that will create a need for a better run accounting department or more advanced reporting features (i.e. government contracting)?
- Would integration of different departments (accounting, customer services, warehouse, etc.) benefit from a more integrated system? Would that drive additional growth?
- Is the Company centralized or decentralized and would a new ERP system best support that characteristic.
In deciding what’s best for your Company, consider contacting your CPA for advice. CPA’s generally work with many companies across various industries and can inform you about both positive and negative results from Companies that are similar to your own. Sometimes, they can even put you in contact with a client who has recently gone through an ERP transition. There is no better decision than an informed decision.
For additional complimentary information regarding this item or other questions you may have please call one of dbbmckennon's offices located in Southern California or email us here.
Ten Questions on Auditor/Accountant Selection
There are various reasons to retain and auditor: required under SEC regulations, for a potential merger or acquisition, sale of the Company, bank loan, etc. Often times executives find themselves having to engage an auditor for the first time, but don’t know how exactly to qualify the quality of auditor being interviewed. Here are 10 questions to ask an audit firm before you engage them.
- Does your firm have significant experience in my industry? Why – you always want to engage an auditor that is familiar with your industry.
- Have you ever been sanctioned by the SEC/PCAOB/AICPA and are you in good standing with all regulatory entities? Why – Being sanctioned by a governing body is a red flag for poor work quality or unethical behavior.
- What type of staff should I expect to be assigned to my engagement and what are their experience levels? Why – Big firms who have significant turnover often send inexperienced staff to the client unsupervised. This creates a situation in which a Controller or CFO end up teaching the staff how to audit. Most Controllers and CFO’s appreciate more seasoned staff that know what they are doing.
- What differentiates you from other firms? Why – Most audit firms are similar in nature at their core, but they do have defining characteristics. Look for a firm that line up with your needs and wants. Be cautious of firms that have prices well below market norms.
- Do you believe the size of your audit firm can accommodate the scope of the work? Alternatively, is your audit firm too large or small for the scope of work needed? Why – You want to engage an audit firm appropriate to the size of your Company in order to gain the most value. You wouldn’t want to engage a Big 4 firm for a small private company needing an audit for a bank loan, just like you wouldn’t engage a local audit firm if you are an international conglomerate.
- How does your firm add value to your audit services? Why – Auditors cannot take the role of management or act in a consulting manner. Thus, it becomes difficult to provide additional value beyond the audit services. However audit firms can and should make recommendations on internal controls, review fraud risk areas and report on finding if issues arise, and be responsive. These are just a few ways auditors can add value to their audit.
- Do you conduct risk based audits and how can that help to achieve a competitive engagement fee? Why – If they don’t they are not within professional standards nor providing services that are in your best interest. You will likely end up overpaying for the services.
- Do you have a PCAOB report that can be viewed online? Why – CPA firms who work on publically traded companies have their own watchdog, the Public Company Accounting Oversight Board ("PCAOB"). Depending on the size of the CPA firm, the PCAOB reviews the quality of the firm's workpapers every 1-3 years. The PCAOB makes comments on the quality of the audit firm’s work. The fewer comments the better. For example dbbmckennon received no comments on our most recent PCAOB report.
- What kind of reputation does your firm have around the community and can you provide references? Why – References are a good way to determine if the audit firm can back up what they say.
- How responsive can I expect your firm to be? Why – If you are a small company engaging a large audit firm, you may not be as important to them as their bigger clients. Look for a firm that will respond to you within 24 hours of any issue arising, can adhere to reasonable timetables, and will give you the attention you deserve no matter the size of your company.
For additional complimentary information regarding this item or other questions you may have please call one of dbbmckennon's offices located in Southern California or email us here.
dbbmckennon Takes to the Air
On Tuesday October 18th, David Gosselin, a director with dbbmckennon, was interviewed on Critical Mass: The Radio Show hosted by Ric Franzi. Topics included future financial concerns of CEO’s, fraud, mitigation of risk through internal controls, and dbbmckennon’s market advantages compared to other CPA firms. dbbmckennon was thrilled to provide our time to contribute to the Orange County business community and get our message to the airwaves. If you didn’t get to listen live, the podcast can be accessed through iTunes podcast. Tune into Ric’s radio show each Tuesday from 4-5pm on www.octalkradio.net.
For additional complimentary information regarding this item or other questions you may have please call one of dbbmckennon's offices located in Southern California or email us here.
IRS to Eliminate High-Low Per Diem Reimbursement Method
In July 2011, the IRS announced that the substantiation policy for reimbursements of out of town business travel will change. Currently, individuals who travel overnight for their employer or business can use the high-low method to substantiate their expenses rather than providing proof of actual costs. Under current IRS regulations, a business can provide per diems to their employees and deduct said per diems for tax purposes without substantiation of cost, so long as the per diem provided is less than the federal reimbursement rate for the specific locality. However, because many businesses have employees traveling across the country and the tracking of reimbursement rates for each locality can become cumbersome, the IRS provided for a simplified high-low method whereby certain cities (i.e. New York, L.A, etc.) had a predefined higher per diem rate and all other localities had a lower rate. Having only two federal rates under this high-low method was meant to simplify the process.
The change to discontinue the high-low method is not yet in effect. Thus, businesses using the high-low method can continue to do so until a formal announcement is made by the IRS. To get information on per diem rates provided by the government, follow this link to the U.S. General Services administration (GSA).
dbbmckennon is a full-service, Certified Public Accounting firm, established to provide tax, attestation and consulting services to individuals and businesses through our offices located in Southern California.
Shell Companies
Shell companies in the past have been abused by promoters as a method to pump and dump penny stocks and reap illicit profits. As a result, the Securities and Exchange Commission (the “SEC”) has issued various regulations under the Securities Act of 1934. These provisions prohibit the use of short form registration of securities on Form S-8 generally used for registering securities for officers, directors, employees and consultants until after 60 days from the date the company ceases to be a shell company. In addition, expanded reporting on Form 8-K, commonly referred to a “Super 8-K”, for reverse mergers (or “back-door registrations”) involving a private operating company and a shell company in the US. The term shell company means a registrant, other than an asset-backed issuer as defined in Item 1101(b) of Regulation AB, that has:
1. No or nominal operations; and
2. Either:
i. No or nominal assets;
ii. Assets consisting solely of cash and cash equivalents; or
iii. Assets consisting of any amount of cash and cash equivalents and nominal other assets.
How is nominal measured? The SEC purposely did not define nominal since they wish to retain some level of judgment to managements and the SEC staff. Often times, it is not easy to determine whether a company with assets is a shell company or deemed an operating company.
A company with a business plan and qualified management team, which has not commenced operations, may be deemed to be a shell company until operations and assets become significant. Additionally, a company which has exited a business, and temporarily has no significant operations or revenue generating assets, would likely fall into classification as a shell company until operating assets are acquired. A company with a royalty stream from licensing may be considered a shell company if revenues and operating activities are nominal, even though investing activities in new products may be significant.
The facts and circumstances need to be addressed with each company that gives the appearance of a shell company, and the related impact on use of Form S-8 and reporting requirements of Form 8-K for US domiciled companies.
dbbmckennon is a registered firm of the Public Company Accounting Oversight Board, performing financial statement audits for public companies, and providing consultations to management teams involving complex accounting and reporting matters before the SEC.
How Many Years of Financial Information are Required for SEC Filers
As small businesses grow, so do opportunities. Those opportunities often times allow for a private company to go public or for a public company to significantly increase operations. So when do companies need to disclose two years of financial information as opposed to three on their annual financial statements on Form 10-K? Public companies whose equity is traded on a public exchange base their reporting requirements off of public float. If the public float (total market value of common stock held by non-affiliates – affiliates generally defined as directors, officers and management, as well as 10% shareholders) is less than $75M as of the last day of the most recent second fiscal quarter, then only two years need be presented. Public float over that amount requires three years of financial presentation for all statements except for the balance sheet, which only requires two.
For private or non-reporting companies who have no equity in the public market and are registering shares with the SEC, the benchmark is revenue. If a Company has less than $50M in annual revenue as reported in its most recent fiscal year (12-month period) based on audited financial information, then only two years of financial statements are required. If revenue is over that amount, three years of financial statement presentation is required for all statements except the balance sheet, which only requires two.
During reverse acquisitions, the SEC rules state that the operating company merging into the shell needs to assess requirements as if it had been a reporting company. This assessment must be done on the date of reverse acquisition. Accordingly, if revenues in the most recent audited fiscal year were over $50M, three years of financial statement presentation would be required as specified above.
dbbmckennon is a registered firm of the Public Company Accounting Oversight Board, performing financial statement audits for public companies, and providing consultations to management teams involving complex accounting and reporting matters before the SEC.
2011 Federal Tax Credits for Consumer Energy Efficiency
In December 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This law extended the tax credits for energy efficiency into 2011. For 2011, the tax credit available represents 10% of the cost of the improvement, up to $500, with a $200 max for windows, and several other set maximums. The maximum tax credit available is $1,500. In addition, there are no upper or lower limits on income to receive the tax credit. Thus, making the credit virtually available to anyone who files a federal tax return. The tax credit must be claimed on 2011 IRS Form 5695 and submitted with you 2011 taxes to be filed by April 15, 2012. In 2010, the tax credit represented 30% of eligible purchase up to a maximum credit of $1,500. In order to qualify for the 2010 tax credit the 2010 IRS Form 5695 should have been filed with your 2010 taxes prior to April 18, 2011. However, if you failed to file for this credit all is not lost. If you think the credit is significant enough it might be worth filing an amendment to your tax return.
For additional information see the Energy Star website or contact us for your specific item.
dbbmckennon Sponsor's The Elite OC Charity Golf Tournament
With our commitment to the betterment of the Southern California communities, dbbmckennon was elated to help sponsor the first annual The Elite OC Charity Golf Tournament held at the Aliso Viejo Country Club on April 25, 2011. The Elite OC was able to bring together the some of the best and brightest professionals from our community to raise thousands of dollars for the Never Forgotten Foundation. We were also glad to place two of our own team members in the tournament to further help the cause. We look forward to our continued partnership with The Elite OC and assisting them in their future endeavors.
1099 Requirements Repealed and Explained
It’s no surprise that so many people were confused about the proposed changes to 1099 reporting requirements. Prior to the Healthcare Reform bill being passed in 2010, businesses had to issue 1099’s to any non-corporations for services provided over $600. Upon the Healthcare Reform bill being passed, new regulations required that businesses issue 1099’s to ANY person OR corporation that provided ANY good or service individually or in aggregate over $600. As you can imagine, the new regulations created quite a stir with the additional work that would be required. These changes were to go into effect at the start of 2012. In April 2011, the new requirements were repealed; much to the pleasure of many small businesses that were deterred by the now former increased reporting measures. So as we stride ahead in 2011 and march toward 2012, fear not, as the infamous 1099 requirement will not be looming and the old requirements are new again.
XBRL for Small Businesses is Coming!!
XBRL (Extensive Business Reporting Language) has been around for quite a few years but is just now hitting the forefront for small businesses. Effective for periods ending after June 15, 2011, all small business filers will be required to file, commonly referred to as tagging, the basic financial statements (balance sheet, statement of operations, cash flows and equity statement) using XBRL. After the first year, small business filers will be required to tag the details of disclosures within the footnotes which can be a bigger challenge than the basic financial statements. For more information regarding XBRL view this video titled XBRL Explained
The deadline for XBRL is approaching fast and thus small business filers should be preparing now. Feel free to give dbbmckennon a call or email to discuss your current situation.
The 1099 drama to continue?
As previously discussed there are some big changes scheduled to take effect in January 2012 related to Form 1099 reporting. However, based on the Presidents State of the Union address on January 25, 2010, it appears the President has indicated the willingness to potentially repeal the additional Form 1099 reporting requirements. “Now, I've heard rumors that a few of you have some concerns about the new health care law,” stated the President. “So let me be the first to say that anything can be improved. If you have ideas about how to improve this law by making care better or more affordable, I am eager to work with you. We can start right now by correcting a flaw in the legislation that has placed an unnecessary bookkeeping burden on small businesses.”
Based on recent legislation introduced by the Senate Finance Committee Chairmand Max Baucus and the Senate Majority Leader Harry Reid, the new legislation would repeal the requirement for all goods and services to be reported by small businesses on Form 1099 beginning in January 2012. As of right now, the reporting requirement still stands so stay tuned.
New IRS Reporting Requirements for Brokers and Transfer Agents
Effective January 1, 2011, brokers and transfer agents will be required to report the costs basis of a security in which was sold during the reporting year on Form 1099-B. Previously, only the sales proceeds received in connection with the sale of a security was included on Form 1099-B. The new requirement is intended to ease the burden on the investor and result in more accurate reporting to the IRS. However, the potential for confusion exists. For instance, assume an individual receives a compensatory grant of stock from an employer. On the date of issuance, the fair market value of the stock is $100 resulting in taxable income to the employee of the same amount. Assuming the individual sells the stock for $200, the broker or transfer agent would most likely report the transaction at a sales price of $200 and a $0 basis. The broker or transfer agent did not take into account the taxable income of $100 already recognized by the individual. Thus, individuals will have to critically review their copy of the 1099-B to ensure completeness.
The IRS has the opinion that the institutions tracking this information are more sophisticated than most investors and thus, the reporting should be more accurate. The IRS has noted in the past, since the investor was responsible for the reporting, there was room for error and interpretation. Accordingly, the IRS believes that they lose out on billions in tax revenue annually due to misreporting.
dbbmckennon's PCAOB Report
On December 23, 2010, dbbmckennon received its Public Company Accounting Oversight Board's (PCAOB) inspection report. “We are proud to announce that the PCAOB’s report did not cite any audit or internal control deficiency comments in connection with our audits of public-company clients”, said Michael McKennon, “audit deficiencies are fairly common, and if serious, may result in sanctions by the PCAOB and/or SEC. There have been recent sanctions to Orange County firms in connection with audit failures. We will continue to strive for the highest level of audit quality to serve the public’s interest.” A copy of the PCAOB inspection report can be found here: dbbmckennon's PCAOB Inspection Report
Five Tips for Year-End Close
Many small businesses lack formal procedures to properly close their books. Here are five tips that can help streamline the process this year. 1. Make a list and check it twice – The most effective way to close a period correctly and accurately is to make sure everything is complete. Before the year-end, make a checklist of accounts to close, schedules to prepare, tasks to complete, and timeline for each. Keep track of what has been done, and what needs to be done. Identify who needs to prepare the work and who will review it. Then have each of those individuals sign-off on the checklist along the way. Preparing ahead of time and using a checklist will ensure completeness and timeliness.
2. Know your entries – Along with the checklist you make above, create a list of standard journal entries that are required to be made monthly, quarterly, and annually. Compare the list to your current close to make sure everything is properly booked.
3. Use Technology – Along with a listing of standard journal entries, try to use the power of your accounting system (i.e. QuickBooks, PeachTree, etc). Whatever entries can be automated should be set up to do so (i.e. monthly fixed asset depreciation, etc). Also try to use Excel to create dynamic workpapers that create journal entries for you each period to better automate the process. A little work ahead of time will save you time down the road.
4. Analyze variances – Compare each account in your current trial balance against the prior year(s). Set expectations of what you should see based on known activities, economic factors, and recent transactions. Look for accounts that vary outside of those expectations. This simple task will help you determine if something is misstated.
5. Have a tax plan – Develop a plan with your CPA regarding taxes and tax payments. Pro-active planning will help minimize tax burdens, increase cash management effectiveness, and ease your worries about the unknown.
Don’t hesitate to give dbbmckennon a call or email today, to ask us about how these tips can be integrated to your specific situation. We would be happy to help answer your questions or assist you in compliance in order to put your company on a path to success.
Professor Michael McKennon (at least for a day)
On November 4, 2010, Michael McKennon was honored to be able to give back to his Alma Mater, California State University at Fullerton (CSUF), through the "Professor for a Day" program. This was the third consecutive year Michael participated in the program. Michael was allowed to speak with a “Critical Thinking” honors’ class filled with the exceptional freshman students at CSUF. “This was a very insightful and creative group of students I was able to share my time with. I asked each student what they are doing to make a difference in their respective fields to ensure they have opportunities upon graduation. Their answers were surprising; most students were actively involved in some regard, but they admitted that they could do more", said Michael. In addition, Michael communicated the need to make a difference in their respective fields by donating their time in academia and associations which enhance positions in their respective careers. At the end of the instruction, Michael had various individuals thank him for his time and the information provided. Once such individual added the following:
"Dear Mr. Michael McKennon:
Thank you for sharing your experiences today with my Critical Thinking Honors class. I truly appreciate your advise to start networking with teachers, peers, and possibly start looking into internships to get our names out there. You did not simply state that we have to or should network but you also explained why it is important to network. We, students, often hear from other people that we need to start networking since our first year of college to build strong relationships throughout our college years. Some students ignore this because they believe they have time to start in the next few years. Thank you again for taking time out of your busy day to give a truly motivational speech.
Sincerely,
Natassja Romero"
Based on the feedback and appreciation received, Michael is looking forward to next year's opportunity. Upon returning to work that day, Michael expressed the following to the firm personnel: "Sometimes we lose sight of our responsibilities as professionals to make a difference in our communities. I feel great reward in impacting these fine young honor students."
You can view Michael's Certificate here.
SOX 404(b) is Officially Dead for Small Business Filers!
Good news for small public companies, SOX 404(b) is dead! On July 21, 2010, the exemption from SOX 404(b), for public companies with less than $75 million in market capitalization was signed into law by President Obama. Since SOX was introduced in 2002, small public companies have experienced delays in the effective date of SOX 404(b), which requires auditors to attest to the design and operating effectiveness of internal controls. Each year we watched as the deadline for compliance extended for another year. When the House approved a version of its bill earlier this year, which included provisions to reverse 404(b) compliance for smaller reporting companies, we wrote our US Senators Boxer and Feinstein to support such provision to remove compliance with 404(b) for smaller reporting companies. Our position was contrary to our audit and accounting industry, its professionals and partners, as well as its powerful associations. Our position was contrary for various reasons, none of which took any consideration of the lost opportunity fees our industry would have enjoyed had 404(b) for smaller reporting companies not been repealed.
But don’t get too excited, SOX 404(a) is still in effect for all public companies. SOX 404(a) requires management to conduct a review of internal controls over financial reporting and document your processes and findings.
Here is a brief description of what you should consider based on your company size.
Management of public company with less than $75 million in market capitalization: Continue to conduct internal review of controls, as you will need to conclude on the effectiveness of those controls in 10-K’s and 10-Q’s. Be aware of future growth of your company and its stock price through organic growth or M&A activity, and consider the fact that you may have to be compliant with SOX 404(b) at some point. If a material weakness is discovered by the auditor the company will still be required to report the deficiency in its quarterly and/or annual reports and their remediation plan for such.
Management of Public company with over $75 million in market capitalization: Stay tuned to additional changes as studies are being conducted to determine the benefit of SOX 404(b) to companies with market caps between $75 and $250 million. Such studies could result in companies with higher market caps also being exempt.
Private companies looking to go public through mergers, acquisitions, or reverse mergers: Consider what your market capitalization may be based on your IPO, reverse acquisition, etc. If you are planning on selling your company to a public company or taking it public, know that private companies with strong internal control framework are usually more valuable than those without it.
All Companies: As part of an audit, an auditor is REQUIRED to conduct a walkthrough of your internal controls to assess where risks may be and to identify potential weaknesses in controls. If deficiencies are detected they are REQUIRED to inform you. Use this information to strengthen your company.
Don’t hesitate to give dbbmckennon a call or email today, to ask us about how SOX 404(a) and the exemption to 404(b) impacts your company, especially if you are considering a reverse merger, acquisition, or other entity altering transaction. We would be happy to help answer your questions or assist you in compliance in order to put your company on a path to success.
Is a Reverse Acquisition right for you?
One of the more popular ways for a small business to go public is through a reverse acquisition. A reverse acquisition allows private companies to go public without a number of regulatory requirements present in a typical IPO. A typical IPO can take at least six months to complete and require hundreds of thousands of dollars in professional fees due to the comment and review process with the Securities and Exchange Commission. A typical reverse acquisition, involves 100% of the private company’s stock or equivalent being acquired for a large equity stake in the public company, generally over 90% but can be as low as 40%. Generally, the public company is known as a “shell corporation” in which has limited or no operations. The two businesses are then merged using the private company’s products with a public company’s structure.
One of the biggest factors in considering whether or not you have a reverse acquisition is who controls the public company after the transaction. In cases where the private company’s shareholders own less than 50% of the public company, analysis of operational control, board control or other factors impacting control must be conducted. We have experienced reverse acquisitions where private company shareholders control 40% of the public company stock, and the board is controlled or evenly controlled by the private company’s management. Thus, control is maintained by the private company.
A reverse acquisition, with a public company will cause a change in reporting entity which, in effect, causes the financial statements of the public company to be eliminated and replaced with those of the private company for all previously reported periods which are included in future filings with the SEC; no previously filed reports of the public company are required to be amended and re-filed. A change in reporting entity is generally a preferable reporting requirement because the readers of the financial statements can see comparable amounts in the interim and annual reporting by the public company. Alternatively, in a forward acquisition, the private company’s financial statements and results are included only from the date of the acquisition forward.
One of the key requirements to a reverse acquisition is that an 8-K, commonly known as a Super 8-K, needs to be filed within four (4) business days of the acquisition date. The 8-K will include information similar to that of a standard 10-K, including audited and reviewed financial statements of the private company. All future public filings will present the historical financial statements of the private company as if they acquired the public company.
If you are considering a reverse acquisition it is extremely important that you obtain proper guidance from a securities attorney and an experienced auditor. One of the major delays in closing a reverse acquisition is obtaining the required audits and the completed 8-K. At dbbmckennon we have conducted numerous audits in connection with reverse acquisitions. If you are contemplating a reverse acquisition to take your private company public, please contact us to discuss if this is the right method for you.