How to Prepare Your Financial Records for an IPO
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- Mar 26, 2025
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Preparing financial records is a crucial step in the initial public offering (IPO) process. Companies must present historical financial results, proforma financial information, and operational data. Properly prepared financial statements help identify potential issues early, allowing for resolution before going public. Accrual-basis financial statements, compliant with applicable accounting standards, are required due diligence by regulators and underwriters, including SEC review.
Challenges during the IPO process include:
- Regulatory compliance
- Potential restatement of prior financial results to comply with US GAAP
- Audits under PCAOB standards, which may reveal weaknesses in internal controls and financial reporting
- Detailed financial analysis throughout the process
To prepare for an IPO, a company should take the following steps:
- Understand the financial requirements of an IPO
- Assess the status of your current financial records
- Prepare your financial statements for the IPO
Understanding the Financial Requirements of an IPO
US privately held companies must follow US GAAP, set by the Financial Accounting Standards Board, ensuring consistency, comparability, and transparency in financial statements. Foreign Private Issuers (FPIs) may use International Financial Reporting Standards (IFRS), which offer more flexibility but require expert consultation.
Public companies in the United States are required to comply with the Sarbanes-Oxley Act of 2002 (SOX), which enhances corporate governance and establishes Internal Controls over Financial Reporting (ICFR). Under Section 404, management assesses and reports on internal controls, with external auditors verifying effectiveness. Section 302 requires certifications from the CEO and CFO for SEC-submitted financial reports. SOX mandates an audit committee of independent directors with financial expertise.
Key IPO Financial Reporting Requirements
The main financial reporting requirements of an IPO includes filing Form S-1 and the prospectus. The Form S-1 is the primary document filed with the SEC and contains:
- Business overview
- Risk factors
- Audited financial statements (US GAAP or IFRS for FPIs, typically for the last three years)
- Management Discussion and Analysis (MD&A)
- Executive compensation
- Legal proceedings
- Use of proceeds
Also included in Form S-1 is the Prospectus, the document to be distributed to potential investors that contains information about the company, historical and pro forma financial data, risk factors, management details, the Board of Directors (including compensation and ownership), and offering terms.
Understanding these requirements involves significant effort and time. Having an advisor from the start helps you stay on track.
Assess the Status of Your Current Financial Records
A company looking to go public needs to conduct a thorough assessment of its financial records. Records must be accurate, complete, and compliant with US GAAP for all periods presented in audited financial statements included in Form S-1. These records will be scrutinized by auditors, regulators, bankers, and attorneys. Early assessment helps identify and address issues, preventing delays and additional costs.
Key Steps in Assessing Financial Records
- Make sure all transactions are properly recorded by reviewing account reconciliations and supporting documents for errors and inconsistencies.
- Verify the completeness and accuracy of records, making sure that all agreements and transactions are accurately reflected, including those known only to upper management.
- Document significant transactions with white papers detailing the accounting position.
- Review significant litigation for its impact on financial records and disclosures.
- Evaluate internal controls over financial reporting and their documentation.
- Make sure that a robust system is in place to prevent, detect, and address fraud, errors, and inconsistencies.
The company’s auditors will assess and, if necessary, report on the controls in place as part of the financial statement audit. If a company going through the IPO process has not been audited in the past, it may lack documentation for the controls in place.
Prepare Your Financial Statements for the IPO
Financial statements for Form S-1 must meet the SEC's requirements, providing investors with transparent and reliable information. Typically, 2-3 years of audited historical financial statements are required, along with interim financial information if the IPO occurs mid-year. For example, an IPO in May 2025 would include audited statements for 2022, 2023, and 2024, as well as unaudited quarterly data for Q1 2025.
Required Financial Statements for an IPO
Financial statements required to be included in the document are the balance sheet, income statement, statement of shareholder’s equity, and cash flow statement.
These statements must comply with U.S. GAAP or IFRS and include full disclosure footnotes detailing accounting policies, significant transactions, and other relevant information. Companies can reference publicly traded peers for guidance and complete a comprehensive disclosure checklist.
Key Aspects of Financial Statement Preparation
In preparing the financial statements, the company should make sure they are presenting them clearly and concisely, disclosing only what is required by the SEC and US GAAP. Any information disclosed in the document will be scrutinized and will need to be presented consistently throughout the Form S-1.
Include income statement projections, forecasted balance sheets, and detailed cash flow analysis, and clearly state assumptions used in the models.
Financial modeling and forecasting can help set investor expectations for how the company plans to grow and generate returns in the future. Additionally, financial models are crucial for determining a company’s value before an IPO. Projections for future earnings, growth, and market share will directly influence the pricing of the offering.
The SEC requires forward-looking information to be included in the Form S-1 and prospectus filed by the company. The company will need to make sure that the forward-looking statements are based on reasonable assumptions and risks to the company. A sensitivity analysis is typically included to demonstrate how the outcomes change when the variables in the model are altered.
Post-IPO Financial Reporting and Compliance Requirements
After an IPO, companies are required to meet ongoing financial reporting and compliance requirements established by the SEC and stock exchanges, such as the NYSE and NASDAQ. This includes filing quarterly financial statements on Form 10-Q and annual statements on Form 10-K. Additionally, companies must file Form 8-K for any material events or changes between regular filings.
Form 10-Q and Form 10-K
Form 10-Q is typically due 45 days after the end of each fiscal quarter, containing unaudited financial statements and a discussion of operations and financial condition. It serves as a quarterly update to the prior year’s audited Form 10-K.
Form 10-K is filed 60 to 90 days after fiscal year-end, depending on the company’s filing status. It includes audited financial statements, detailed management discussion and analysis, disclosures about operations, risks, legal proceedings, and executive compensation.
Additionally, companies must file a proxy statement (From DEF 14A) annually before the shareholder meeting, detailing matters to be voted on, such as director elections, executive compensation, and equity compensation plans.
Compliance Post IPO
Companies will need to maintain robust internal controls and effective corporate governance practices following their IPO. Companies must remain SOX compliant, which requires them to maintain adequate internal controls over financial reports and assess the effectiveness of these controls annually in their Form 10-K. External auditors will test these controls, and any weaknesses identified can affect the auditor’s opinion.
Strong corporate governance involves having a competent board of directors and an effective executive management team that works in the best interests of shareholders. This includes independent board members, clear executive compensation policies, and transparent decision-making processes. Effective governance helps manage risks and accountability, establishing clear lines of responsibility and mechanisms for addressing conflicts of interest and ethical concerns. Companies lacking strong governance practices are vulnerable to scandals, shareholder disputes, and legal challenges that can damage their reputation.
Get IPO Ready
If you are a company contemplating an IPO or are early in the IPO process, consider these resources to help guide you along the way.
Identifying a support team early on can help you navigate the IPO process successfully.
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Lindsey Gross
Lindsey Gross is a Director in the Outsourced Finance and Accounting Group with expertise in both private and public companies. She serves a diverse client base, including technology and commercial clients.
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