Question

1. What are the auditing challenges associated with reverse mergers? How can investors protect themselves from the liabilities that may be contained in corporate shells?

Answer 1

Reverse Merger is a process where the private company buys public company and becomes a public company by itself.

Auditors may face challenges in changed accounting policies, suppose the company was following IFRS and it changes into public company which is following US GAAP may have to change the entire accounting policy after the reverse merge. Also the share consolidation may happen as reverse stock splits happen.This can be also a challenge to auditors. At times paperwork done by the Public accountants may conflict with the after merge auditor's opinions. A private company may have been a US company which may acquire a China public company - in this case auditors may face challenges from the differences in regulations of one nation to the other.

Investors can look into the company's future prospects, and fundamental factors like growth in sales, revenue and cost effective management, operational management etc. Excessive debt taken can be shown in the financial statements where the investors can apprehend by the debt management of the company. How quickly are the suppliers or debtors are able to get back the debts can show the effectiveness of the the company. Therefore proper knowledge of a company can save an investor from facing the stock derogation and future losses.