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CAQ Issues an Alert on SPACs

The Center for Audit Quality (CAQ) has released Auditor and Audit Committee Considerations Relating to Special Purpose Acquisition Company (SPAC) Initial Public Offerings and Mergers. The May 4 Alert provides an overview of what a SPAC is and some key considerations for auditors and audit committees related to the risks and challenges a private company faces when entering the public markets through a merger with a SPAC. The Alert notes that SPACs “have been used for decades as a mechanism for private companies to access capital markets” but have recently “exploded in popularity.” The merger of a SPAC and a private company can raise complex accounting, financial reporting, and governance issues that the company’s audit committee needs to consider.


What is a SPAC?


The Alert defines a SPAC is a shell company formed for the purpose of raising funds to be used in connection with the acquisition of an existing operating company (the target company). The lifecycle of a SPAC has five phases:

  • Formation.

  • IPO. After formation, a SPAC raises capital through an initial public offering, the proceeds of which are held in trust while the SPAC identifies a target company.

  • Target Search. The SPAC tries to acquire a target company in a specific industry or geographic location. Under its governing documents, the SPAC may have a limited time to identify a target. If a target is not acquired within that period, the SPAC is liquidated, and proceeds returned to shareholders.

  • Shareholder Vote. Shareholder approval is typically required for consummation of the SPAC’s merger with the target. Shareholders who oppose the merger may elect to redeem their shares.

  • Merger or “De-SPAC” Transaction. Assuming shareholder approval, the SPAC and the target merge. This results in the target becoming a publicly traded company.

Considerations for Auditors


The CAQ highlights and discusses considerations for auditors related to SPAC merger transactions:

  • Client Acceptance and Continuance. Issues auditors should consider relating to the acceptance as an audit client of a SPAC or a private company preparing to go public through a SPAC merger, include:

o Capabilities of management (e.g., Does management have the skills to comply with the SEC’s financial statement reporting requirements?).

o Internal controls/books and records (e.g., Does the post-merger entity have a system of internal control over financial reporting that complies with public company requirements?).

o Timing (e.g., Does the target company have a comprehensive plan in place to address the demands of becoming a public company on an accelerated timeline?).

o Auditor independence (e.g., Has the permissibility of non-audit services and prior involvement in the preparation of the financial statements of the target company been considered?).

o Capabilities of audit engagement team (e.g., Does the auditor have the capacity to complete the audit for the merger transaction and continue to perform audits and reviews of the surviving company?).

o Corporate governance (e.g., Is the post-merger entity prepared to comply with exchange listing requirements, such as independent directors and an audit committee financial expert?).

  • Auditor Registration with the PCAOB. Auditors of SPACs and their post-merger public target companies must be registered with the PCAOB.

  • Auditor Reporting. Among other reporting issues, the auditor may be required to issue audit reports under both PCAOB public company auditing standards and AICPA private company standards.

  • Disclosure Considerations. On December 22, 2020, the SEC’s Division of Corporation Finance issued CF Disclosure Guidance: Topic No. 11, which provides guidance on disclosure considerations for SPACs in connection with their initial public offerings and subsequent business combination transactions. The auditor should be familiar with this guidance and its application to the target.

  • Classification of Warrant Provisions. On April 12, the SEC staff issued Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”). This statement required many SPACs to restate their financial statements to treat warrants issued as liabilities, rather than equity. The auditor should consider whether management has addressed the classification of warrants issued by the SPAC in accordance with this guidance.

  • Elevated Risk of Fraud. The auditor should consider risk factors or conditions that could heighten fraud risk, such as overly optimistic forecasts or pressure to achieve earnings or stock price targets.

Considerations for Audit Committees


The CAQ also recommends that audit committees of private companies determining whether to go public via a SPAC transaction consider a range of issues, many of which are similar to the auditor considerations:

  • Public Company Readiness. The company’s readiness to go public includes such factors as financial reporting expertise, internal control effectiveness, investor relations capability, executive compensation plan, and tax implications.

  • SPAC Sponsor Experience. Does the SPAC leadership have a track record of completing SPAC transactions? Does the SPAC leadership have expertise in the target’s industry or geography?

  • Corporate Governance. Do board members, including those on the audit committee, have the right diversity of skillsets, level of experience, and independence? Does the company have an internal audit function? Does the company have a whistleblower complaint process as required by SOX?

  • Accounting, Reporting, and Disclosure Issues. Does the audit committee understand management’s plans to de-SPAC? Has management considered whether to seek pre-clearance from the SEC with respect to complex accounting issues? Have controls been established regarding the transition?

  • External Auditor Selection and Oversight. Do the external auditors have the right experience? Are they registered with the PCAOB? Do they meet SEC and PCAOB independence requirements?


Comment: The CAQ’s Alert provides a primer for audit committees on SPACs. Further, on March 31, the SEC’s Acting Chief Accountant issued a public statement, Financial Reporting and Auditing Considerations of Companies Merging with SPACs. While the Chief Accountant’s statement is somewhat more technical than the CAQ’s Alert, that document also provides useful background for those learning about this area.

As the Alert suggests, becoming a public company outside of the traditional IPO process presents a variety of challenges and hurdles that the private company’s board needs to address in a compressed timeframe. New SEC Chair Gensler has identified SPACs as an area on which he wants to focus. Boards considering involvement in a SPAC merger should make sure they are fully educated on the risks involved.

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