Anyone who has ever struggled through Intermediate or scored two consecutive 74s on FAR can tell you accounting is hard, man. But when you're in the financial business and hoping to go public, there is a minimum expectation that you at least have some idea what you're doing before you invite the auditors over to take a peek ahead of an IPO.
That is exactly what didn't happen with high-speed trading firm Virtu Financial. On the one hand, you have to admire their honesty. On the other… uh… guys?
Virtu filed its registration statement with the Securities and Exchange Commission yesterday, and there was one disclosure in particular, on page 45, that caught my eye. The 12-year-old firm said that, in connection with its most recent audit, "we and our independent registered public accounting firm identified a material weakness in our internal controls over financial reporting," as of Dec. 31. The details are a sight to behold. Basically, the company said it doesn't know how to do accounting.
"This material weakness related to our inability to prepare accurate financial statements, resulting from a lack of reconciliations, a lack of detailed review and insufficient resources and level of technical accounting expertise within the accounting function," Virtu's disclosure went on.
"Although we have hired senior accounting and finance employees, reallocated existing internal resources and retained third-party consultants to help enhance our internal controls over financial reporting following reviews of our accounting and finance function conducted by members of senior management and by a third-party consultant, there can be no assurance that we will remediate this material weakness or avoid future weaknesses or deficiencies."
The rest of that disclosure looks a little something like this:
Any failure to remediate this material weakness and any future weaknesses or deficiencies or any failure to implement required new or improved controls or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. If our management or our independent registered public accounting firm were to conclude in their reports that our internal control over financial reporting was not effective, investors could lose confidence in our reported financial information, and the trading price of our Class A common stock could drop significantly. Failure to comply with Section 404 of Sarbanes-Oxley could potentially subject us to sanctions or investigations by the SEC, FINRA or other regulatory authorities, as well as increasing the risk of liability arising from litigation based on securities law.
Despite the above, Deloitte went ahead and issued an unqualified opinion, sorta:
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of financial condition is free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
In our opinion, such statement of financial condition presents fairly, in all material respects, the financial position of Virtu Financial, Inc. as of December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
There is A LOT more to sift through in that beast of a registration statement, but we dug up this gem in particular which is deliciously ironic:
Until May 2011, when it was repaid and terminated, we had a note payable to Independent Bank, which is indirectly majority owned by Mr. Viola [founder and Executive Chairman of Virtu]. Mr. Cifu is also an investor in Independent Bank and sits on its board of directors. The note bore interest at the prime rate, was collateralized by all of our exchange memberships, was guaranteed by Mr. Viola and was subject to certain financial covenants. The highest principal amount outstanding on the note during the year ended December 31, 2011 was $1.3 million, and interest payments on the note during such period were $0.02 million.
Independent Bank LOL.
What Virtu failed to disclaim in its registration statement, obviously, is that no one advised them to get a handle on internal controls before attempting to go public. Why bother? Just disclaim this could all be made up for all we know because we aren't accountants, man and move on, amiright?
So, who is going to run out and buy up a bunch of this if and when Virtu goes public? Can't wait, sounds like a steal!