Tech IPO companies issuing more accounting warnings

More companies are disclosing "material weaknesses" in their IPO filings this year, particularly in in the tech sector where more than half have made such warnings.

Audit and consulting giant PwC reports that the percentage of tech IPO filings that flagged potential future accounting problems jumped to 55 percent in the first three quarter of this year from 30 percent

in all of last year.

 

That compares with a much smaller 4 percent increase to 31 percent overall in IPO filings this year compared to last year.

In addition to the big jump in material weakness warnings in the tech sector, a similar leap has come in consumer goods companies planning IPOs — going from 32 percent last year to 47 percent this year.

---

All of this is happening at a time that IPOs, particularly in the tech sector, are down dramatically in the U.S. Renaissance Capital reports that only 17 tech companies have debuted on Wall Street this year, on pace to be the lowest number since the banking meltdown in 2009.

There have been only six tech IPOs by Bay Area companies this year, down from 16 last year. Only two of this year's new public company tech stocks — FitBit and Pure Storage — are trading above their IPO prices.

The material weaknesses cited by PwC are warnings of deficiencies in financial reporting that indicate a "reasonable possibility that a material misstatement" of annual or interim financial statements will not be prevented or detected.

The most common problems relate to not having enough accounting personnel (24 percent of total material weaknesses reported), lack of appropriate procedures (20 percent) and inappropriate reconciliation of complex or non-routine transactions (19 percent).

The companies usually say how they are going to fix their potential problems when they disclose them.

When investors get surprised by material weakness disclosures after a company goes public it usually brings a barrel of trouble in the form of negative press, lower analyst ratings and stock price declines.

So disclosing such issues in an IPO prospectus may give companies somewhat of a "hall pass" when problems arise later on, PwC said.

It's not entirely clear what is causing this jump in material weakness disclosures. Is it because the companies going public in 2015 have more potential problems? Or is it just that they are being more cautious in a down year for IPOs?

In either case, don't say they didn't warn you.