Center for Audit Quality Releases Alert on SPACs, Warns of Unique Risks

By:
Chris Gaetano
Published Date:
May 4, 2021
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The Center for Audit Quality (CAQ) released an alert that warns audit professionals of the unique risks presented by engagements involving special purpose acquisition companies (SPACs).

A SPAC is type of investment vehicle that has become increasingly popular over the past year or so. At its most rudimentary level, a SPAC is a company that exists for the sole purpose of acquiring another company, with no other substantial business activity behind it. The National Law Review noted that, in 2020, half of all companies that went public did so through a SPAC. The typical lifecycle of a SPAC, according to the CAQ, is: formation, IPO, target search, shareholder vote and, finally, either a merger or "de-SPAC" transition.

Due to its heavy reliance on mergers to complete its goals, a SPAC has several unique audit risks, which the CAQ said will need particular attention. It asked that auditors, when working with SPACs, consider the following questions:

* Is management capable of complying with the SEC’s financial statement reporting requirements and deadlines, including the need to “unwind” any historically applied private company GAAP alternatives created by the FASB [Financial Accounting Standards Board] and its Private Company Council or to adopt standards that were not effective for private companies? Further, are they aware of, or possess, the skills they will need in mergers such as budgeting, tax planning, IT, and exchange listing requirements?

* Does the post-merger entity have (or have the ability and skill set to implement) a system of internal control over financial reporting (ICFR) that complies with public company requirements? Are there material weaknesses that warrant disclosure? If so, does the entity have the ability to respond to the material weaknesses and enhance its ICFR? Is it compliant with other provisions, such as the Foreign Corruption Practices Act?

* Does the target company have a comprehensive plan in place to address the demands of becoming a public company on an accelerated timeline?

* Is the audit firm in compliance with both the PCAOB [Public Company Accounting Oversight Board] and SEC independence requirements? Have partner rotation requirements been considered?

* Does the audit team have the skills necessary to perform the engagement?

* Does the auditor need to comply with both PCAOB and AICPA standards?

* Is the post-merger entity prepared to comply with the requirements of the exchange on which it is listed (for example, the New York Stock Exchange and Nasdaq require independent directors and an audit committee, including an audit committee financial expert)? If not, do they have the ability to have them in place prior to consummation of the transaction?

* Has the auditor discussed  CF Disclosure Guidance: Topic No. 11 with the client?

* Has management accounted for Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”)?

* Has the auditor considered risk factors or conditions that could heighten fraud risk, such as overly optimistic forecasts or pressure to achieve earnings or stock price targets?

The CAQ also advised audit committee members of private companies looking to go public via a SPAC to consider whether the company has proper financial reporting expertise, if it is in compliance with internal control regulations, if the SPAC sponsor has  a track record of doing these kinds of transactions before, the board composition post-merger, whether the audit committee understands the specifics of the de-SPAC transition, and whether the external auditors have the right experience.

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