At a workshop yesterday, I had a brief discussion with an emerging fund manager about when to select the fund’s auditor. Lots of new managers may think since audit is usually not done until the end of the year, they don’t need to go through this selection process till later. Sounds reasonable, but professionals say otherwise.
In fact, it’s best to make the decision when you launch the fund. Why? Read on…
Most auditors will help you review your legal documents, some provide such service for free. With their experience working with many different funds, the auditors pick up the non-standard language fairly quickly. My auditor friend Maria with M.D.Hall & Company Inc. recently helped her client avoid unnecessary administrative burden by suggesting refinements to the language in the legal documents that accomplished the client’s intend. Never underestimate the auditors. They’ve seen it all.
Under the directory of the partnership agreement or offering memorandom, the key service providers such as administrator, auditor, investment adviser, director, prime broker and custodian, and legal and tax advisors are listed. The investors may then use this information to perform their due diligence work. Remember, your service providers’ reputation is as important as your own reputation.
Most investors want to know when they will have the audit report or K-1 so their accountant can finish their job on time. It’s a good idea to have an early communication with your auditor as to when the report will be available, and possibly have it in writing in the audit engagement letter as well. The last thing you want to do is to piss off your investors because your auditor cannot deliver the report timely as promised.
On a side note, it’s also a good idea to keep your auditor informed throughout the year, especially when you make significant private investments: this will help the auditor plans the work schedule accordingly. Take this piece of advice from an ex-auditor.
Like all other operational expenses, audit fees shall be recorded on an accrual basis and properly allocated to all partners throughout the year. Why is it important? Imagine an investor comes into the fund at the beginning of the year, holding 50% of the fund’s NAV; before the year end, this investor fully redeems itself. If the fund does not properly accrue the audit fees until year end, the remaining investors will be short-changed since the big investor walks away without sharing its portion of the audit fees.
So yes, besides a million other things you’ve got to do to launch your fund, you will need to select the auditor as well. I have another blog article about selecting hedge fund auditors/tax preparers. Happy reading!
* Special thanks to Maria Hall, who kindly shared her story and thoughts on this topic with me. To learn more about Maria and her audit service, visit: www.mdhallco.com.
