The biggest talk of the financial world currently is Snap Inc (commonly known as Snapchat) and its recent IPO – the largest since 2014.
The so-called “unicorn” (a tech startup valued at $1billion or more), was given an impressively high valuation of $33 billion when it went public, despite its seemingly shaky business model and losses of millions each year. While the company grew revenue to over $404 million in 2016 (around 600%), it is still not profitable and saw losses of almost $515 million last year.
But what’s had accountants talking isn’t just this valuation, or the impressive rise and immediate decline in the social media platform’s stock prices. What is particularly interesting about Snap Inc’s IPO are the related accounting service fees it has reported to have paid, which seem to be strangely high.
When filing for an IPO, companies have to disclose information relating to all expenses relating to the application, including legal and accounting costs. Accounting expenses are separate and distinct to audit fees and are paid to an external auditor, while legal fees are usually paid to the company’s counsel for advice and creating the registration statement; fees which, on average, outweigh the accounting costs by around 75%.
However, as industry experts have identified, in this case Snap Inc’s accounting fees were nearly four times the legal fees, reaching $6.9 million. This is significantly larger than the comparable accounting fees of Facebook and Twitter, as well as of similar IPO companies. It’s a particularly unusual and notable difference!
There are two possible contributing factors, identifiable in the company’s registration statement. According to the document, in 2014 PwC identified a material weakness caused by a lack of qualified accounting personnel; an issue that was rectified by the end of 2015. Then, in early 2016, Snap Inc moved accountants from PwC to Ernst & Young – a switch that could have increased costs as the new auditor became more familiar with the business.
Whatever the cause, Snap Inc’s unusually high auditor fees can be seen as a cause for concern – a possible indication of hidden, unspecified accounting issues. While this could just be a reflection of receiving a bad deal when switching firms, it is still not a good sign for investors! This case is yet another reminder of the importance of having crystal clear accounting and methods to avoid mistakes and pitfalls.
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