When an Italian Company was having difficulty with a U.S.-based auditing firm, a Partner and Director of the Italian Group in the International Department of Prager Metis CPAs, Andrea Fantozzi, referred the Company to Prager Metis – CFO Advisory Services.
We were retained by the Italian Company, and immediately got to work assisting the CFO and Controller by providing documentation that would satisfy the auditors and required by the Company to move forward with its planned public offering.
Overcoming Obstacles to Achieve Compliance
Prior to retaining the Prager Metis CFO Advisory team, the Company had furnished materials to the U.S.-based auditor more than a dozen times. Even after receiving all these packages, the auditor continued to seek additional backup and information.
The company was advised by its board to retain a firm that could assist the CFO and Controller in resolving outstanding issues with the auditor. Their initial request was to have our team produce financials with full footnote disclosures and work papers in a format that would be acceptable to the auditor, along with all necessary substantiation and documentation.
In addition to processing the auditor’s request, we performed an analysis of accounts, one of which involved the company’s intercompany accounts, including five different entities that were being consolidated. Because the intercompany accounts did not tie out, we helped the CFO and Controller reconcile what was missing.
We also reviewed the Company’s revenue recognition and discovered that it had not reserved properly for accounts receivable that were being collected. They had recognized the revenue, but there were invoices outstanding in excess of the year, so we had to determine which income should be reported and which income should be deferred. Finally, we prepared financial statements and footnotes that were required to comply with the auditor’s request.
Moving Forward with a Sustainable, Long-Term Solution
In this case, the Italian Company simply did not have the internal capabilities or expertise to fully comply with SEC and auditor requirements. In fact, we proposed top-site journal entries because the books and records did not reflect the appropriate numbers, even though the CFO and Controller thought the year end was closed.
Although the Company has since hired a new CFO, more work remains to ensure that financial statements are presented quarterly as required by 10-Q filings and that annual 10-K reports include audited financial statements. Ultimately, continued compliance difficulties would delay the filing of financials with the SEC, delay the Company’s public offering and S-1, and possibly lead to a shortage of capital required to continue the business.
As a result, we recommended retaining our team as a fractional CFO to supplement and complement the Italian Company’s internal team. This would allow us to work with each of their five different entities on a daily basis to ensure compliance.
There are many companies, not just in Italy but Israel, Turkey, Germany, and other countries, that operate and/or report in the U.S. and need to comply with SEC requirements. Many struggle to provide SEC auditors with the necessary financials and could face serious consequences.
If your company is in a similar situation, retaining our CFO Advisory team as a Fractional CFO is a solution to explore. Please feel free to contact me for more information.