The following post is the majority of a letter I sent to a senior contact at the SEC today:
Last week I was up and down Silicon Valley talking to venture capitalists and CFOs. The week before I was in Boston, Waltham and along Route 128. People are simply fed up with being held hostage by the accounting profession and the big accounting firms are clearly hurting the process of going public.
The President of China once said that NASDAQ was the crown jewel of the US economy. His view was based on US willingness to take investment risk and to create new and vital businesses that had access low-cost capital via our unparalleled IPO markets.
The clear measure of what made US capital markets the “envy of the rest of the World” was our success in bringing companies public and giving birth to whole new industries (for example, the semiconductor industry, the computer industry, the biotechnology industry and the internet). While there are more IPOs today than there were in the years immediately after the bubble, the absolute number of IPOs in 2006 and 2007 (the “rebound years”) pales in comparison to the years prior to the bubble (1991-1996).
This is troubling. In the view of many seasoned professionals, the cost and time required to clear the accounting profession post Sarbanes-Oxley has undermined the process of going public and accessing the public markets. Many issuers now avoid the public markets altogether. Many venture capitalists now avoid making investments where they must rely on the public markets for an exit. Is this the balance that we want?
The following is some specific CFO and venture feedback from my last two weeks in Silicon Valley and along Rte. 128:
i. Accounting firm costs are out of control. “It’s the only profession that gets away with ‘Higher costs and markedly worse service and thrives.”
ii. “The accountants are costing us more than our lead investment bank. How perverse is that?”
iii. That even within the same accounting firm, their SEC practice staff may force a re-audit of the prior 3 years numbers at great expense and cause a company to “Miss the window of accessing the public markets.”
iv. That anytime the audit partner needs to “…run something up the flagpole to NY, you can count on a minimum two-week delay before you get a response.” Everything now is going through the very narrow head of a funnel.
v. That the accounting firms’ National offices can and frequently do reverse the practice of prior audit partners as an issuer prepares to go public. This results in delays, restatements and higher costs that undermine the issuer’s ability to go public – “…All the while the accounting firm that reversed itself is making more and more money at the expense of the issuer.”
vi. That when the issuer has a legitimate difference of opinion as to the proper accounting treatment for some item, and if they try to argue it with their accountants, the accounting firm will threaten to require disclosure of a “risk factor” in the S-1 that states something to the effect that there has been disagreement with the auditor. Clearly, this is a disclosure that an issuer can ill-afford.
After 25 years on Wall Street I think I can safely conclude that this pendulum has created an aftermath which is undermining US competitiveness. I can’t believe that this is where Congress and the SEC intend us to be.
What should be done to right-size this problem? Can a clear distinction be made between companies tracking to go public and those that are already public? Between small and large cap companies? The problems that created the political impetus to the passage of Sarbanes-Oxley (As you know, I was Vice Chairman of NASDAQ at the time and worked on the revised listing and corporate governance requirements and gave input to Mike Oxley) were confined to large cap companies (e.g., Enron, WorldCom, Adelphi Communications, etc.). Unfortunately, we seem to have created a hurdle for small cap companies to go public that was unintended.
I have seldom, if ever, heard a largely fragmented community (venture capitalists and issuers) voice so consistently the same complaint. For the long-term good of US competitiveness, we must strike a better balance.
Given that Barney Franks (D) took over from Mike Oxley (R) is from Massachusetts, that Nancy Pelosi (D) is from California and Speaker of the House, and that Chuck Schumer (D) is from New York (site of both Exchanges) I would hope that with Chairman Cox’s (R) leadership there is a bipartisan window to address this problem in the name of long-term US competitiveness.
I do think that Chairman Cox has done an exceptional job and I recognize fully that the above-referenced problem was not of his making. For all the good that Sarbanes-Oxley did, it was clearly drafted and passed in haste in response to the political and media climate at the time. Not unexpectedly, there have been “unforeseen consequences” and while I understand that the SEC has focused some attention on lessening the burden of Sarbanes-Oxley compliance on small capitalization stocks, I think it is time to focus attention and to hold hearings on how the current practice of accounting has harmed the IPO market in the United States.
Chairman – CMA Partners