Compass has resolved the significant issues with its financial filings, known as material weaknesses, meeting a self-imposed deadline.
The disclosure generally refers to a systemic problem at a company that threatens the accuracy of its financial reporting, though weaknesses can take many forms. They were flagged by the company’s auditing firm, in this case, PwC.
PwC said last year it was able to provide “reasonable assurance” Compass’ numbers are correct despite the issues, which were identified before its April 2021 IPO have been present in each report since the company’s public debut. The brokerage said in June it planned to resolve the weaknesses by the end of 2023.
An executive was vague about how they remediated the problems, declining to share how much the firm spent on correcting them or go into detail beyond what the firm states in its annual report.
“We just followed the standard process that many public companies do,” the executive said. “It’s not uncommon for newly public companies to have these things … We took the steps to correct them that included tightening up some of our internal processes, hiring some of the right people, and also just time. Some of these things take time.”
The statements echoed sentiments from executives last summer, who downplayed the severity of the weaknesses.
Outside experts disagreed with Compass executives, saying the persistence and wide-ranging nature of the weaknesses pointed to serious flaws with company culture and reporting processes.
“They have a hole that somebody can drive a truck through either via a big mistake or fraud,” said Francine McKenna, then a Wharton accounting lecturer, told The Real Deal at the time.
Despite the concerns, Compass did not have to publish a misstatement, or a correction to its earnings reports.
While many companies have material weaknesses in their earnings reports, they’re more commonly seen in those with limited funding that are new to the public markets.
Compass’ annual report lists 11 steps it took to remediate the weaknesses, some of which date back to 2021, the year of the company’s IPO, when the weaknesses became an issue. That includes hiring an outside accounting advisory firm, which an executive declined to identify.
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Compass reported material weaknesses in several areas, the broadest of which was its control environment, which refers to the tone set by a company’s senior leadership around financial reporting.
The company previously said the control environment concerns flagged by PwC had to do with documentation, and not with senior leadership.
The annual report says control environment problems included “a lack of an appropriate level of experience and training commensurate with public company requirements.” Compass says it implemented training as part of its resolution efforts.
Compass also had problems with maintaining controls over its IT systems, including access to sensitive financial data. An executive previously said the concerns were with tracking and documenting login access.
The firm fixed its IT issues in part by adding an IT expert and an internal controls, documentation and testing team, along with formalizing IT procedures for key financial systems, including training relevant employees and segregating duties —an important component in preventing embezzlement and fraud.
Compass also formalized accounting policies and controls for the first time, and established controls over key reports and data.