An Initial Public Offering (IPO) represents a pivotal moment for a company, namely transitioning from a privately held entity to one that is publicly traded. The complex of IPO process demands compliances to regulatory requirements and transparency standards to safeguard the interests of investors. which aim to protect investors’ interests. Capital market regulations require independent auditors as the party responsible for safeguarding the public interest in accounting aspects. The role of the independent auditor includes various important functions such as: general audit of historical financial statements, review of the IPO prospectus for accounting aspects, preparation of comfort letters, technical support to answer technical accounting and financial reporting questions, reissuance of audited financial statements, and share allotment audits carried out by independent auditors is different.
General Audit
The independent auditor’s primary responsibility is the general audit of the company’s financial statements. This involves an in-depth examination of financial records, transactions, and accounting practices to ensure that the financial statements present a true and fair view of the company’s financial position. By evaluating the accuracy, completeness, and compliance of the financial data with applicable accounting standards, the auditor provides a level of assurance that is crucial for stakeholders. This assurance is foundational, as it underpins all other tasks the auditor performs throughout the IPO process.
Beyond merely verifying numbers, the general audit serves to identify potential areas of risk or misstatement that could impact the company’s financial health. The auditor’s thorough review helps in uncovering discrepancies, assessing the efficacy of internal controls, and evaluating the overall financial integrity of the company. This comprehensive audit work not only prepares the company for its public debut but also builds investor confidence by demonstrating that the company’s financial statements have been meticulously scrutinized by an independent expert.
Review of IPO Prospectus
The IPO prospectus is a critical document that outlines essential information about the company, including its financial performance, business model, and future growth prospects. The independent auditor’s role in this context is to review the financial information presented in the prospectus to ensure its consistency with the audited financial statements. This review is vital as it ensures that potential investors receive accurate and reliable financial information, free from material misstatements or omissions. The auditor’s expertise helps to identify and rectify any inconsistencies or errors before the prospectus is finalized and made public.
A critical part of this review process is the “circle-up” procedure. During this procedure, the auditor, company management, and underwriters meticulously review the financial information included in the prospectus. They mark up and annotate the document to ensure clarity and accuracy, agreeing on the specific figures and disclosures that will be presented to investors. This collaborative effort helps to ensure that all parties have a mutual understanding of the financial data and its presentation. By identifying and addressing potential issues early in the process, the circle-up procedure enhances the reliability and transparency of the financial information in the prospectus.
Moreover, the auditor ensures that the financial disclosures in the prospectus comply with relevant accounting standards and regulatory requirements. This involves a thorough examination of financial projections, management’s discussion and analysis (MD&A), and other financial disclosures. By verifying that all financial information is presented accurately and transparently, the independent auditor plays a crucial role in enhancing the credibility of the prospectus, thereby fostering investor trust and facilitating a successful IPO.
Preparation of Comfort Letter
A comfort letter is a document prepared by the independen auditor to provide assurance to underwriter and other requesting parties about certain financial information. This letter guided by the “Standar Jasa Lain 7500 (2023)”, “Surat Komforta untuk Pejamin Emisi dan Pihak Peminta Tertentu Lain” issued by the Indonesian Institute of Certified Public Accountants (IAPI)*), typically includes confirmations about the accuracy of financial statements and the consistency of financial data. The comfort letter reassures underwriter that the financial information has been thoroughly vetted by an independent third party, thereby reducing their risk and enhancing their confidence in the IPO process.
The preparation of a comfort letter involves detailed procedures and assessments by the auditor. It covers areas such as unaudited interim financial information, changes in financial statement items, and other financial data included in the registration statement. By providing this additional layer of scrutiny, the auditor helps to ensure that all financial information presented to potential investors is reliable and accurate. This assurance is crucial for underwriter, as it enables them to make informed decisions about the IPO, ultimately contributing to the success of the offering.
*) Prior to the issuance of SJL 7500 (2023), the applicable standard was “International Standard on Related Services (ISRS) 4400 – Engagements to Perform Agreed-Upon Procedures Regarding Financial Information” issued by the International Federation of Accountants (IFAC) and Indonesian Institute of Certified Public Accountants (IAPI)
Technical Support Related to Answering Questions by Regulators
During the IPO process, companies commonly face numerous queries and requests for additional information from regulators, such as the Financial Service Authority (OJK) in Indonesia. The independent auditor plays a pivotal role in providing technical support to the company in responding to these regulatory inquiries. This support involves clarifying complex financial matters, supplying additional documentation or explanations, and ensuring that the company’s responses are accurate, timely, and compliant with regulatory standards. The auditor’s deep understanding of the company’s financials and regulatory requirements is invaluable in navigating these interactions effectively.
In addition to addressing specific queries, the auditor helps the company prepare for potential regulatory challenges, by ensuring that all financial information is transparent and fully compliant with applicable laws and regulations. This proactive approach minimizes the risk of delays or complications in the IPO process. By acting as an intermediary between the company and regulators, the auditor helps to streamline communication, resolve issues efficiently, and maintain a smooth progression towards the IPO.
Reissuance of Audited Financial Statements
In certain situations, BEI or OJK may request the reissuance of audited financial statements. This request can arise due to changes in accounting standards, additional regulatory requirements, or the need for updated financial information. The reissuance process must adhere to specific auditing standards, particularly Standard on Auditing (SA) 560 – Subsequent Events, which outlines the auditor’s responsibilities regarding events occurring between the date of the financial statements and the date of the auditor’s report. The independent auditor must perform additional audit procedures to ensure that the reissued financial statements reflect any significant subsequent events and remain accurate and complete.
The reissuance of financial statements involves a thorough reassessment of the company’s financial position and performance. The auditor examines subsequent events that could impact the financial statements and updates them accordingly. This process ensures that all relevant information is disclosed, providing a true and fair view of the company’s financial health at the time of the IPO. By adhering to stringent auditing standards, the auditor ensures that the reissued financial statements maintain their integrity and reliability, thereby upholding investor confidence and regulatory compliance.
Audit of Allotment by Different Auditor
In IPOs, a different auditor must be appointed to audit the allotment of shares, to ensure that the process is fair and transparent. This independent audit is crucial for maintaining investor confidence and complying with regulatory requirements. The new auditor’s role is to perform a thorough examination of the allotment process, verifying the accuracy of share allocation, ensuring compliance with the terms of the IPO, and confirming that the allotment is conducted equitably. This additional layer of scrutiny helps prevent potential manipulation or unfair practices in the share distribution process, thereby safeguarding the interests of all investors.
The audit of allotment involves detailed procedures to verify that the allocation of shares aligns with the company’s stated policies and regulatory guidelines. The auditor reviews the allotment criteria, checks the accuracy of share distribution records, and ensures that all eligible investors receive their fair share of the offering. By conducting an independent audit of the allotment process, the auditor enhances the transparency and fairness of the IPO, fostering investor trust and contributing to the overall success of the public offering.
Conclusion
The role of an independent auditor in an Initial Public Offering is comprehensive and critical to the success of the process. From conducting general audits to reviewing the IPO prospectus, preparing comfort letters, providing technical support, reissuing audited financial statements, and audit of share allotments by different auditors. The independent auditor ensures that all financial information is accurate, reliable, and compliant with regulatory standards. This extensive involvement not only enhances the credibility of the company’s financial disclosures, but also builds investor confidence in the integrity of the IPO process.
