Hedge Fund Audit – How to ensure a seamless process
To the old adage of “Death and taxes are the only certainties in life” should be added “financial statement audits” for those of us involved in the Funds industry.
Every year thousands of hedge fund audits are completed and every year there is much undue stress in this process. The process does not need to be stressful if appropriate planning is completed between the various parties and there is a designated person controlling the process.
Why do we need a Hedge Fund Audit? Every fund in which there is a third party managing monies should have an audit, whether regulated or not, as there should be checks and balances. In looking at the largest domicile, Cayman Islands, where funds are regulated under the Mutual Funds Law, the audit needs to be completed, signed off and filed within 6 months of the Fund’s financial year-end (with the exception of Funds which meet the criteria set out in section 4(4) of the Mutual Funds Law which are exempt). On paper this seems like a sufficient timeframe to ensure all is completed with time to spare, yet in reality many funds struggle to meet this deadline due to a multitude of reasons.
In recent years many funds have set audit completion dates of 30, 60 or 90 days post year-end. This may be to satisfy key investors or to ensure the financial statements are on a similar timescale to tax reporting requirements. Such shorter timescales increase the challenges for completion in an unplanned hedge fund audit process.
Below is an outline of some practical steps to follow to ensure filings are made on time and without unnecessary issues and stress:
- Interim audit work
This is the greatest area of weakness and failure, the quality of the interim audit work performed will have a direct impact on the timeliness of audit completion. Ideally, 4 to 12 weeks prior to year-end the Administrator and Auditor will open discussions with regards planning and agreeing an audit timetable to ensure all is completed on time and ahead of any filing deadlines. It is important that an audit timetable is agreed by all parties in advance. The more detail contained therein the more useful the document. The timetable should specify agreed dates for each expected draft of the financial statements.
For funds which provide monthly valuations it makes sense to arrange for the auditor to carry out an on-site visit in the last couple of months of the financial year. A typical pre-audit checklist would cover the following:
|Provided by Administrator||Provided by Auditor|
|Fund’s NAV packs for the year to date||List of reporting standards in issue for year under review but not yet effective|
|Copies of bank, broker and custodian statements for year to date||List of reporting standards which have come into effect for year under review|
|Trades report detailing all investor transactions for year to date||Draft Audit Confirmation Letters to banks/brokers/custodian and legal advisors|
|Copy of the Administrator’s current year SOC1 Report (SSAE16)||Audit Timetable|
|General ledgers for the year to date|
At this point it makes sense to ensure the template financial statements being prepared are sent to the Auditor for them to agree to the pro-forma and agree all note disclosure updates and presentation prior to year-end.
2. Data Security
Given the ever-growing challenge of maintaining data privacy it is key to ensure the data is provided to the auditors in a secure manner. Saving the data to a Secure FTP is one method of doing so. Email should not be relied upon to transmit data and the utilization of USB devices should be restricted to encrypted, if utilized at all.
- Post Year-End
Once the Fund’s year-end NAV is approved the audit process kicks into gear. Key objectives at this point would be:
- Proactiveness – if there is a delay on any aspect it could affect the filing deadlines. Many audit firms are at their busiest during this time of year given most funds have similar year-ends. This makes it vital that the administrator is the owner of the process to ensure key dates are maintained and any slippage is discussed and agreed.
- Communication – maintain communication with the auditors to ensure they have all requested items and also with the fund manager to ensure they are updated with progress and to monitor progress against the agreed audit timetable.
In order to achieve these objectives, the most effective method is to schedule regular catch-up calls between the relevant parties. All queries should be maintained in an excel schedule and the list be discussed on each call. Weekly or biweekly calls would be sufficient in most cases. Higher frequency may be appropriate where the audit process is condensed (e.g. to 30 – 90-day completion deadlines)
- Post Sign-Off
It always makes sense to have a review following sign-off to identify areas which caused issues and to determine how they could be improved for the following year.
Overall, if the steps outlined above are followed it will minimize the disruption and ultimately save on any more unnecessary grey hairs for those of us involved in the completion of the audit, whether on the manager, administrator or auditor side. Effective management of the hedge fund audit process can ensure zero over runs and zero additional costs both financial and timewise for the manager. Equinoxe’s experienced financial statement account managers ensure that this process is seamless for the manager with proactive and disciplined working practices.
For more information on Hedge Fund Audit or for further conversations on how Equinoxe can help in all facets of your business please contact us via our website www.equinoxeais.com or via email to firstname.lastname@example.org