Improving accounting controls beyond your audit

In the private fund world, audits are a necessary control to have a third party review your fund’s financial information and validate to your stakeholders that your fund is functioning appropriately. While they are a vital part of compliance health, we often remind clients that reviews of accounting functions don’t stop there.

We’ve found that doing your own internal reviews of items like expenses allocation, valuations, fee and billing charges, etc. are crucial when adhering with the Custody Rule, section 206(4)-2 of the Advisers Act. It’s telling that our clients regularly receive comments from the SEC during exams highlighting the need to enhance internal monitoring of private fund accounting functions.

It makes sense why firms would think that, on the surface, their audit would be sufficient when paying for an independent third-party to come in and review finances and provide a summary of any findings. While getting a clean audit report is crucial to your organization and shouldn’t be overlooked, the SEC also wants to make sure that your internal team understands your firm’s accounting function and is being overseen on a frequent basis by someone close to the organization.

Despite independence of an auditor providing an essential control in itself, that separation also leaves gaps that may be missed by those who don’t truly understand the ins and outs of a fund, and its processes.

There are some essential reviews compliance teams should be doing on a regular basis:

  • Expense allocation: Expenses charged to your funds must be sampled. Your compliance team must ensure the amount of the expense matches the invoice, and that the actual expense being charged is allowed by the PPM.
  • Valuation: It’s worth reviewing a sample of valuations given to securities, particularly Level III, to ensure the internal valuation process is being appropriately followed. Calculations need to be accurate and match what gets posted in the funds.
  • Fees and billing: Clients should be sampled to confirm their agreed upon fee rate. Your compliance team should then test the calculation that was done to make sure it matches the agreement with the client. Finally, it’s important to check that the actual amount that gets charged to the client matches the calculation.
  • Side letters: Compliance teams should be aware of the side letters that exist, sampling these to confirm that the agreements between the funds and the investors are being met.

How we can help

From working with a number of clients, we’ve identified this as a common deficiency we see them receive from the SEC, so it’s important to get your accounting control house in order before you undertake an exam.

Our team can provide mock exam testing and staff training to help you get on top of these reviews and the regulator’s expectations.