SEC order highlights need for service provider oversight

The recent charges brought by the SEC against a private fund auditor and an audit engagement partner are a great reminder of how important oversight of service providers is in the financial industry.

The SEC’s complaint alleges that the auditor and the audit engagement partner identified investment valuations as a significant fraud risk but didn’t take the necessary steps to respond. It also noted that the individuals failed to obtain sufficient audit evidence about the method of measuring fair value, the valuation models and whether alternative calculation assumptions were considered – not exercising due care. The regulator also found that the audit firm had deficient quality controls to adhere to professional auditing standards.

This case serves as a stark reminder of the importance of selecting qualified and competent service providers. It is vital to conduct thorough due diligence, both at the onset of a relationship and on a recurring basis, on their qualifications and processes. Failure to do so may not only put the adviser’s clients at risk, but they may also face significant regulatory sanctions.

Some other notable takeaways from this case include the following:

  • It’s important to engage service providers who are experienced and knowledgeable in the financial services industry. A strong third-party can provide valuable insights and recommendations on best practices, identify risks and deficiencies, and help make sure that your business is exceeding its full potential. A weak third-party only adds more burden to advisers if they fail to complete tasks the adviser is reliant on them for.
  • Once a third-party is engaged, it’s vital that your compliance team conducts regular and thorough reviews of their work. It is good practice to review all third-party vendors, particularly those providing meaningful support, at least once a year to confirm they are still fulfilling their end of the agreement. The earlier an issue is identified, the easier it is to resolve.

If you are not regularly conducting reviews of your service providers, you should consider adding that as a regular part of your compliance program. Advisers rely on third parties to complete parts of their business that they are unable to do themselves, so it’s easy to become complacent and assume they are covering their responsibilities. For the sake of your business and your clients, you want to make sure you are confident that is the case before it’s too late.