A huge surge this year in the number of special-purpose acquisition companies (SPACs) has led to interest from investors and scrutiny on the part of the SEC.
New guidance from the Center for Audit Quality (CAQ), which is affiliated with the AICPA, provides ideas for auditors and audit committees to consider related to SPACs and the initial public offerings and mergers that are related to them.
A SPAC is a shell company formed to raise funds through an initial public offering for the purpose of acquiring an existing company. The surging interest in SPACs is illustrated by the 300 SPAC IPOs that took place in the first few months of 2021, compared with 59 that took place in all of 2019, according to the CAQ.
But bringing a private company into the public markets through a SPAC poses unique risks and challenges, and the surge in interest has attracted the SEC’s attention. In March, the SEC warned that investors shouldn’t make investing decisions based on a celebrity’s involvement with a SPAC.
Later that month, SEC Acting Chief Accountant Paul Munter issued a public statement on financial reporting and auditing considerations for companies merging with SPACs, explaining that the merger of a SPAC and a target company often raises complex financial reporting and governance issues.
“We encourage stakeholders to consider the risks, complexities, and challenges related to SPAC mergers, including careful consideration of whether the target company has a clear, comprehensive plan to be prepared to be a public company,” Munter said in the statement.
The CAQ’s guidance for auditors includes considerations for client acceptance and continuance; auditor registration with the PCAOB; auditor reporting; disclosure considerations; classification of warrant provisions; and elevated risk of fraud.
Audit committees of companies also have a lot to consider prior to, during, and after a SPAC merger transaction. According to the CAQ, these include readiness of the company to go public; the experience and track record of the SPAC sponsor; corporate governance; accounting, reporting, and disclosure issues; and external auditor selection and oversight.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.