How to have a holly jolly audit

It’s that time of year again. No, we're not talking about balancing precariously on a ladder to put up blinking lights and holiday décor. But something equally (okay, more) essential – and at times precarious: closing out the financial year and prepping for the related year-end audit.

While fund managers have a few months into the new year to complete the audit, the overwhelming majority of work should be completed months in advance to allow back office staff ample time to deal with unforeseen issues or additional requests, according to PE Manager sources. GPs that allow the auditor to come in on an interim basis (perhaps reviewing six months of activity at the half year point) leave less work for everybody at year end. 

To make things even more fluid, transactions should be well documented  – including what the initial investment was, how much money was involved, what the terms were – because that is what the auditors are going to ask for before they make any interpretation, sources have said in the past. 

Even those GPs that begin preparing in autumn can find themselves under pressure. Denise Marks, chief financial officer of SV Life Sciences, says last year auditors gave her the message that the firm’s valuations and procedures looked reasonable after reviewing submitted Q3 numbers. And later that year, with auditors already familiar with the firm’s books, it was a relatively effortless process for the same to be said in Q4. However, at the 11th hour closing in on the firm’s audit deadline, Marks was answering more questions and given notice that more investee company valuations would need to be examined. The lesson was it can be impossible to predict precisely what auditors will demand.

The most important thing for fund managers, sources stress, is to maintain constant dialogue and close relationships with auditors. That’s always important, but arguably more so this year given  some changes in accounting rules. 

For example, as per ASU2011-04, which pushes US fair value rules closer to international accounting standards, funds must now include more disclosures when valuing illiquid assets that are tough to value (known as Level 3 assets), which makes up the bulk of private equity holdings. “GPs should have discussions throughout the year with their auditors in regards to valuations since there are many inputs that can be used and there is no guidance on how much information is required to support the inputs used in the valuation models,” says Eisneramper audit partner Nicholas Tsafos, making it all the more crucial to seek guidance from auditors on what best practices are developing in the industry. Moreover whatever is disclosed will need to sync with what US firms report in their Form PFs (which large-scale GPs have already begun filing) as well as marketing materials. 

By providing auditors a complete understanding as early as possible of what transpired during the year with portfolio companies, the holiday season can be a less stressful one. Or at least less stressful than stapling Rudolph to the roof…