Three years after the project was initiated, the American Institute of Certified Public Accountants is now preparing to develop a report on best practices for addressing the practice of a company issuing cheap stock to its employees in the period just preceding an IPO.
The SEC had requested the Institute address this issue, but the guidelines had been delayed due to disagreements among task force members. "The staff had high hopes this could lead to useful guidance addressing issues that preparers, auditors, and regulators face on a daily basis with respect to accounting for cheap stock. Unfortunately, that project has lacked leadership and has not shown any progress in the last year," wrote Lynn Turner, former chief accountant at the SEC in a letter to Arleen Thomas, V.P. of Professional Services and Standards at the AICPA.
Larry Dodyk, a partner at PricewaterhouseCoopers, is optimistic about the development of a best practices guide. "Right now there's not a lot of places to go in the literature to deal with this," he said. Companies typically have to rely on valuations done at the time of financing rounds while a company is private. This information, which is very subjective, then becomes the basis for the SEC's examination of whether stock issued to employees was overly discounted.
Reviewing filings will be a much easier job for the SEC if a best practices guide becomes available. The task force is due to begin meeting next month.