Every company offering securities to investors under Regulation Crowdfunding (“Reg CF”) is required to provide financial statements that are prepared in accordance with generally accepted accounting principles.
For offerings seeking over $107,000, those financial statements are required to be reviewed by an independent public accountant (second helpings under Reg CF may require financial statements audited by an independent public accountant for raises of more than $535,000 in the prior 12 months).
While most companies have correctly complied with the review or audit requirement, some companies have failed to engage accountants that are actually independent, potentially leading to liability for failure to comply with Reg CF.
To make things even more complicated, the independence standards for Reg CF are different than the standards for other types of public securities offerings – so an accountant that reviewed financials for an offering for Reg CF may not be able to audit for the purposes of Regulation A.
Why should investors care about accountant independence? Generally, the SEC standard of accountant independence is that an accountant must be capable of exercising objective and impartial judgment on the company’s financial statements. If the accountant has previously provided services other than reviewing or auditing financial statements, the accountant’s ability to exercise objective and impartial judgment may be impaired. The types of services that could impair an accountant’s judgment include:
Bookkeeping
Financial information systems design and implementation
Appraisal or valuation services
Actuarial services
Internal audit outsourcing services
Management functions
Investment banking services
Professional services unrelated to the review or audi t.
The SEC focuses on these types of services because they are common services of public accountants that (1) create a mutual or conflicting interest with the company; (2) place the accountant in the position of reviewing or auditing their own work; (3) result in the accountant as acting in the role of management of the company; and (4) place the accountant in a position of being an advocate for the company.
For Reg CF offerings, the most common independence issues result from accountants performing the following two functions:
The accountant drafting the notes/disclosures in the financial statements; and
The accountant calculated the fair market value of the enterprise for the purpose of computing stock option plan expense.
The above list is not an exhaustive list of activities that may impair an accountant’s independence. As part of their own due diligence, investors should confirm with a company that the accountant that provided its review or audit is truly independent.
