Starting January 1st, internal and external accounting teams are in a race against time to deliver substantial amounts of information to auditors on behalf of the GP. As Dorota Kowalski, Senior Director, Fund Accounting, told Institutional Real Estate, Inc., auditors tend to follow the principle of “not documented, not done.” While as a fund manager, you may be able to describe what controls, policies, and procedures you use to conduct your business, the auditor requires evidence that a transaction took place, was appropriately valued, and was included in the final financial reports.
To complete their annual task, auditors decide what information they need from a GP. They tend to look at everything regarding your fund's existence and valuation, including:
☑ Fund formation documents
☑ The operating agreement and partner agreements
☑ LP subscription documents and side letters
☑ Private placement memorandums
☑ Purchase and sale documents
☑ Bank and brokerage account statements
☑ Fund expense invoices, including the fund’s auditor, tax provider, fund administrator, and other outsourced professional services
☑ Cash flows, including investment fundings, investor capital calls and distributions, and carried interest
☑ Correspondence with regulatory agencies
☑ Portfolio company operating agreements and initial investment memorandums
☑ Updated portfolio company cap tables
☑ Financials for each portfolio company, dated as close to year-end as possible
☑ Fund-level financial statements (balance sheet, income statement, schedule of investments, statement of changes in partners' capital, statement of cash flows)
☑ Investor capital statement
☑ Valuation policies—if your fund has acquired any hard-to-value investments, discuss and validate your valuation method with the auditors in the fall to avoid surprises during the official audit season
☑ Footnotes for the financial statements—have your auditor review and comment on these during the fall planning period to reduce back-and-forth during the audit
☑ Minutes of board meetings
Some of these documents can only come from the portfolio company itself, so it’s important to let the team there know what information is needed and on what timeline to meet your auditor’s deadlines.
The auditors will also request the following accounting records:
☑ Internal controls memo or internal control process narratives
☑ Reporting packages, including TBs, balance sheets, income statements, investor allocation sheets, etc.
☑ YTD trial balance & allocations
☑ General ledger for the year-end
☑ Any communications with investors regarding the performance of the fund (i.e., quarterly memos)
For real estate funds, auditors will also want to see:
☑ A consolidation of the property-level financials
Your in-house fund accounting team or fund administrator will be expected to deliver all the necessary documentation to the auditor. One of the best things you as a fund manager can do now is obtain a PBC (prepared by client) request list from your auditor with a timeline of when items are needed. The more you communicate with your auditor and the sooner you do it, the more likely you are to avoid surprises during the official tax and audit season.