Role of the reporting accountant 

in an AIM flotation

Overview of the reporting accountant's role
The reporting accountant is a key member of the team of advisers working on a flotation and takes responsibility for reviewing and reporting on a number of areas, including historical and forecast financial information. The reporting accountant's financial expertise, as well as its experience with the rigours and peculiarities of the flotation process, will help smooth the directors' progression through the process.

The company's directors have onerous responsibilities in relation to their AIM admission document and the reporting accountant helps the directors discharge their responsibilities in a number of areas. Indeed, the reporting accountant's work is a critical part of the process of 'due and careful enquiry' that underpins the AIM admission document.

Qualifications required to act as a reporting accountant
The qualifications necessary to perform the role of a reporting accountant are not strictly defined in the AIM Rules or statute. However, it is usual for the reporting accountant to include an accountant's true and fair opinion (accountants' report) on the directors' historical financial information, as prepared for the purposes of the AIM admission document. Any such person is normally a person who holds a practising certificate and is a "responsible individual" as recognised by a professional body (e.g. the Institute of Chartered Accountants of England and Wales).

The most important issue when selecting a reporting accountant is to ensure that the organisation and the specific team members assigned have had prior experience of acting as reporting accountants on AIM flotations.

Pre-flotation issues
With careful internal resource and project planning, together with the resolution of housekeeping matters prior to embarking on the flotation process, a company can often save money and time. The reporting accountant plays an important role in grooming companies during the pre-flotation period and bridging any gap in expectations.

Corporate structure
Typically the entity that will be floated is a group's holding company, which principally holds the shares in the trading subsidiaries. Some groups will already have existing holding companies.

If the company or business to be floated is part of a larger entity, and that business is to be carved out prior to flotation, then careful consideration needs to be given to any separation issues, whether real or perceived.

Financing structure
Where the company has historically had a complex capital and financing structure, possibly as a result of a previous management buyout (MBO) or private equity finance, a significant restructuring may be required. Simplifying the structure will ensure that at flotation potential investors need not be concerned about the possible complications brought about by a complex structure. More importantly, this will help provide transparency and clarity about the company's future.

Financial reporting
Sometimes companies going public have not been subject to audit, in which case the reporting accountant will need to perform a full audit on the historical financial information. If a company that has not been subject to audit is contemplating going public, it is worthwhile having an audit (even if this is not a legal requirement) to reduce delays once the flotation process starts.

Prior to flotation, companies should carefully re-evaluate their accounting policies and ensure that they are in accordance with accounting standards and industry best practice, as once they have joined AIM their accounting polices will be subject to close public scrutiny.

Tax planning
Tax is an area which is often thought of only after the event or when a problem arises, at considerable cost to the company, its shareholders and its management. If proper planning is undertaken at the outset, significant savings can be achieved. Such planning can also make the process smoother and more cost-efficient.

Flotation process
While the reporting accountant plays a wide role in a company's flotation, its formal responsibilities consist of undertaking certain elements of due diligence and reporting on historical and forecast financial information in an AIM admission document.

Due diligence
A substantial amount of the reporting accountant's time will be spent on conducting financial due diligence on the company and, if applicable, its subsidiary undertakings on behalf of its directors and its nominated adviser.

This due diligence is often presented in two reports known as a long-form report and a working capital report. These reports are private and seen only by the company's directors and its Nomad.

Long-form report
The long-form report is a detailed report on every aspect of the company's business. The actual scope of the long-form report is agreed between the reporting accountant, the company's directors and the Nomad.

The long-form report will provide a comprehensive overview of the company. The contents of a typical report are shown in table above.

Working capital report
The review of forecast financial information is usually included in a private report separate to the long-form report. The working capital report has a specific purpose - to provide assurance to the company's directors and to the Nomad on the adequacy of working capital for a defined period.

The reporting accountant undertakes a detailed review of the company's working capital forecasts, and will work hard to resolve issues with the company during the review so that a 'clean' opinion can be given in the report in relation to the directors' statement.

If the company's working capital is clearly inadequate, early recognition of this will give the company and its advisers time to seek additional sources of capital, such as bank finance or increased fundraising from the flotation.

Historical financial information and accountants' reports
The reporting accountant takes responsibility for their true and fair opinion on the historical financial information with the directors being responsible for the preparation and presentation of the historical financial information.

The reporting accountant normally reviews the auditor's working papers (even if the same firm acts as reporting accountant and auditor) and will be granted permission to do so under a release letter. It will then determine whether any additional procedures need to be performed, for example, where the audit work appears insufficient or access has not been granted to the working papers. In extreme cases this may involve re-performing audit work.

Forecast financial information
Disclosure of forecast financial information is relatively uncommon as it gives investors an obvious opportunity to attack if the company does not meet expectations. However, in certain exceptional circumstances, the Nomad may advise the company to include such information.

The reporting accountant will have to perform specific procedures, such as testing how the forecast information was compiled, in order to give its report.

If the company intends to publish forecast information in the AIM admission document, then the working capital report may serve a second purpose by providing comfort on the reasonableness of those forecast figures.

Establishing ongoing financial reporting procedures
It is important that quoted companies have robust and reliable financial information systems so that accurate information is readily available on a timely basis.

One of the reporting accountant's key responsibilities is to provide an opinion on the directors' statement. As part of the review for the long-form report, the reporting accountant will review the company's financial and management information systems and controls. Using the information gained, together with its experience on the subject, the reporting accountant will then form a view regarding the directors' statement.

This is an extract from an article contributed by Mo Merali, Grant Thornton LLP in the UK to "Professional handbook - Joining AIM" published by the London Stock Exchange.

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