Audit reports offer enormous value, with critical information for investors and valuable insights for operational improvements. However, those benefits aren’t necessarily top-of-mind for fund managers when they think about audit preparation. Instead, audits can feel overwhelming or tedious.
Fund managers can experience a smooth audit with the right planning and support. We spoke with Zain Lalani, Director at STRAIT, to address common questions from fund managers. His insights reveal how fund managers can eliminate audit fatigue and approach the process with confidence.
What is the first step fund managers should take to ensure a smooth audit, and what is the fund administrator’s role in supporting those efforts?
ZL: To help an audit run smoothly, one of the most important things fund managers can do is ensure that timelines are in place from the start. This requires an audit planning call to determine dates for providing interim and year-end PBC items.
For those not familiar with the term "PBC," it stands for "Provided by Client" and is essentially a list of items that the auditors request to assist the process, including schedules and documents. It’s usually a very long list. Here's the good news — fund managers don’t need to shoulder that responsibility. That’s because their fund administrator will provide at least 90% of the items in that list.
The audit planning call should take place in October or November with representatives from the fund administrator and audit firm as well as the fund manager in attendance. The call allows the auditors and the fund administrator to establish milestones, so the audit is completed and sent to investors on time.
What should fund managers know about the information they need to provide for the audit?
ZL: The fund administrator provides the vast majority of information. That’s true here at STRAIT. As soon as my team receives a PBC list, we start working on our client's items. With this approach, we can get information to the auditor quickly, hopefully expediting the audit process. Typically, the PBC items are the same year-to-year, so there are generally no surprises.
There are a few things the fund manager will need to provide. One is the valuation policy if the fund portfolio includes private securities. The fund administrator should already have a copy of the policy to provide to the audit team. If not, fund managers will need to furnish a valuation policy to complete the audit.
Other items that may be required include updated Limited Partnership Agreements if any amendments have been made. Also, fund managers will need to complete a fraud questionnaire that asks them about any litigation brought against the fund, abnormal journal entries, or pricing issues.
The fund administrator will be a helpful resource to ensure all requested items are sent to the audit team expeditiously.
Once the audit is underway, who is responsible for managing the process?
ZL: Fund managers don’t need to monitor the timelines. That’s the job of the fund administrator. Here at STRAIT, we adhere to the timelines established during the initial audit kick-off call and follow up periodically with the auditors. If the fund administrator sees a lag on the audit side, it’s their responsibility to contact the audit team and make sure they have what’s needed to complete their testing.
In addition, the fund administrator needs to stay abreast of any changes in accounting pronouncements. For example, as a result of COVID, there’s a special disclosure we need to have within the footnotes for this year. This disclosure should state that the uncertainty of the long-term economic impacts is unknown. Also, in the last few years, there has been a change in FASB ASC 820 for Level 3 securities. Level 3 securities are illiquid and the most difficult to value. These amendments affect the footnotes of the financial statements by changing the how and what of the disclosure.
How can fund administrators help guide fund managers who haven't experienced a full audit before?
ZL: Most fund managers are deeply immersed in managing the portfolio and lean on us as the fund administrator to oversee and manage the audit process. At STRAIT, we take this responsibility very seriously, walking fund managers through every step of the process, particularly during the first audit.
Our team discusses everything we’ve prepared before sending it over to the auditors, including the fund’s balance sheet, income statement, and cash flow statements. We explain why we need to make certain footnotes and review the GAAP rules that require us to disclose investments above a certain percentage of the portfolio. Those are just a few examples. It’s an important part of the work we do at STRAIT because we can help clients understand the process, getting them more comfortable with future audits.
Also, if you’re a new fund manager, don’t be intimidated by that long PBC list. It can look overwhelming but remember that fund managers only need to provide a couple of those items — four or five, at most. As I mentioned before, for at least 90% of that information, fund managers can rely on their fund administrator.
Reach out today to learn more about how STRAIT can support your organization to ensure a smooth audit.