Question

Various Types of Forensic and Non-forensic Audits

Case 3

A small biomedical company has had great success in the last four years and is now generating $75 million per year in sales. The company has only three employees, all siblings. Their strategy for success has involved leveraging a few valuable patents and outsourcing almost all business functions. The siblings are planning to take their company public with the hope of generating capital for expansion. Launching an IPO, however, will require them to become SOX 404 compliant. At present, the siblings are the only members of the board of directors and are the only officers of the company.

1. Analyze whether it is possible for a three-person company to become SOX 404 compliant?

2. What general steps should the siblings take to do so?

Answer 1

1 ) SOX Section mandates all public traded companies must establish internal controls and test and maintain those controls to ensure their effectiveness. The purpose of SoX is to reduce chances of corporate fraud by increasing requirements of financial reporting.

Emerging growth company (EGC) is a new category of public company. An EGC generally has less stringent reporting requirements.EGCs are exempted from 404 for the five years after going public.

For qualifying EGC , following are conditions:

1.The EGC's total gross revenue do not exceed $ 1 billion during the five year period,

2.The EGC's market capitalisation doesn't exceed $700 million,or

3. The EGC doesn't issue more than $1Billion in non convertible debentures in three year period.

2.

Siblings should take care in issue of debentures not exceeded 1billion and revenue should not increase$1billion in revenue.If exceeded during the period then they must comply 404 reporting regulations.