Surprise exams got a shock of their own in 2020

If life’s all about timing, Rothschild Capital Partners in New York must be living it up. Its auditor filed its surprise custody exam report on the IAPD in late February, just before all things changed.

That good fortune may not smile upon Troy Capital Group in Santa Monica, California. The RIA’s Form ADV brochure discloses that it hires “an independent public accountant to conduct an annual surprise examination” of fund assets that the advisor has custody of. However, the IAPD contains no accountant’s report for Troy.

Perhaps the firm has run into difficulty finding an accountant willing to do a surprise exam during a pandemic. Troy’s CCO David Eisler didn’t return inquiries but others have told us it has been a chore to lure an accountant in in this year of the pandemic.

Audits with a twist

“I’m right in the middle of it now,” said CCO Doris Karras at Straightline in Troy, Michigan of her firm’s annual surprise custody exam. The advisor has used the same accountant for six years. “But this is the first time that they’re actually not coming into the office to watch me personally grab the information off of the computer,” Karras said. “Usually they sit right behind me or beside me.”

Her accounting firm, Plante & Moran in Chicago, halted onsite audits when the coronavirus came calling. “We’ve done them all remotely” since March, said Steve Schick, a P&M partner in the firm’s financial services practice in Chicago. “There are absolutely challenges. You have to think differently. There’s a value to being on site.”

As with other parts of the industry, online video and other technology, like DocuSign, have rescued the year, Schick said. “We’ve had to re-imagine the process on the fly.”

A camera sits perched behind Karras “so we can watch what’s on their screen,” Schick continued. With Microsoft Teams humming, she will upload requested documents to a secure portal. A query about a client’s account sends Karras to the custodian’s website as the auditor watches remotely and confirms the assets.

The custody rule gives advisors a choice for confirming assets. Of the roughly one-third of advisors that hold custody of client assets, 13 percent opt for the surprise exams. These exams are taking longer given the restrictions leveled by the virus. The SEC has recognized the new difficulties.

Some regulatory relief

In March, the Commission issued regulatory relief in recognition of covid disruptions and extended the deadline for the filing of an accountant’s report by 45 days.

“We’ve only had to use that [extension] in one circumstance so far,” recounted Schick.

“I am actually working on one now,” said David Horton, audit partner in the financial services group of Anchin Block & Anchin, a New York-based accounting firm, of another RIA surprise exam. All audits are remote for the time being.

Advisors have “had to adapt continuously since the start of the pandemic,” he said. This includes welcoming video chats and screen sharing with their auditor. Be sure to inform your auditor of any changes in your P&Ps to make the new experience smoother, Horton suggested.

Despite any difficulties, the majority of advisors “are in a better situation than a lot of industries,” added Horton. This is because advisors have had to turn to online solutions of their own with so many staffers forced to work from home.

Northern Capital Management in Spokane, Washington usually undergoes its surprise exam in the fourth quarter. When CCO Michelle Warner checked with its auditor recently, she was told online video will likely be the tool of choice later this year.

Willing to take a risk

“I would meet them at the office” if they wished, Warner said. She has been working from home during the pandemic. Her auditor informs her its employees have also been working from home. On occasion, should the need arise, an auditor has been going onsite, but most work has been remote, the accountant noted.

John Fitzgerald, audit partner with the accounting firm of Berdon in New York, prefers “speaking to people face to face.” 2020 denies that wish. Still, even in audits predating this year, much of the work was done electronically, he said.

A bigger challenge for auditors like Berdon has been the change in market values due to the pandemic.

He repeated the frequent warning that fraudsters have been energized by the havoc created by the virus. He urges audit targets who are working from home to pay extra attention to confidentiality.

Staff who assist auditors via online video “must be independent of the function we are observing,” said Fitzgerald. He can imagine his firm attempting some onsite reviews before the year ends. It would be prepared to follow protocols, such as wearing masks, limiting contact with others and even first obtaining a covid test.

As taxing as 2020 has been, firms facing audits next year may find an experience even more challenging because of changes they made this year to their internal controls and procedures due to the pandemic, such as adopting “virtual approval processes,” noted Fitzgerald.

This article first appeared in sister publication Regulatory Compliance Watch