Do favorable Accounting Regulations, Trends, and Reporting Standards incentivize the formation of Special Purpose Acquisition Companies (SPACs)?
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Date
2022-05
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The Ohio State University
Abstract
Since 2020, nearly 50% of all public stock exchange listings have utilized Special Purpose Acquisition Company (SPAC) vehicles, generating almost $250 billion in funding during 2021. Prior to 2020, SPACs represented under 1% of all initial public offerings (IPOs). Blank check companies, the predecessor to the modern-day SPAC, have a checkered history leading to scrutiny of their formation. While legally adhering to regulations designed to address these concerns, issues surrounding warrant classifications and insider trading have called the legality of SPACs into question. This study adds to previous research examining key economic and financial incentives behind SPAC's recent surge by highlighting various accounting incentives that have also contributed to this growth.
The growth in SPAC use may result from differences in financial reporting and disclosure requirements for SPACs versus IPOs. Cases such as Jensen v. Stable Road Acquisition Corp. highlight the lack of reporting requirements sponsors face when completing due diligence on targets, leading to an over 200% growth in SPAC fraud litigation post-sale. This study examines SPACs subject to fraud-based litigation using a Benford's law analysis of issued versus restated financial statements and auditor changes before and after the target merger.
A sample of SPAC listings between 2015-2021 was extracted from the Audit Analytics database, and pre- and post-restatement Financial Statements were aggregated via Calcbench. Fraud-based SPAC lawsuits were obtained from the Cornell Law Library database. The Benford's law analysis of SPACs subject to litigation resulted in a leading expected digits goodness of fit of 0.59 post-audit and restatement compared to a 0.008 goodness of fit score before restatement, providing evidence inconsistent with non-fraudulent financial statements before restatement and a lack of such evidence after restatement. The percentage of firms audited by just two mid-tier public accounting firms increased to 82.7% of all SPACs, however just 11.5% of firms retain these auditors after merging.
With SPAC sponsors generating an over 507% average return vs. -15% for post-merger investors, these results suggest addressing the underdeveloped accounting regulations and reporting requirements may be required for this generation of blank check companies to avoid the fate of their predecessors.
Description
Inclusion in 2022 Denman Undergraduate Research Forum
Keywords
Accounting, Mergers & Acquisitions (M&A), Restatements, SPACs, Benford's Law