How to manage the 2024 tax and audit season

With new SEC regulatory changes, reporting requirements, and technology, GPs are bracing for change–and lots of it–during one of the most hectic times of the year. The good news is that focused planning now can minimize the long hours and stress that typically accompany tax season.

To help firms prepare, Juniper Square’s Derek Shanahan and Dorota Kowalski sat down with Bill Pidgeon, CPA, partner at CohnReznick, and Kevin Bettsteller, partner at Gibson, Dunn & Crutcher LLP, in our recent webinar, Making the Most of the Planning Period.

Here are three key takeaways from their conversation:

While aiming to bring private funds into greater parity with registered funds, the new SEC rules mean as soon as 2025, GPs must organize a vast amount of information for both annual and quarterly reports. Bettsteller summarized what will be required within 45 days of the quarter’s end:

1. A detailed fund-level fee, expense, and compensation disclosure—that means a detailed line item reporting of any expenses charged to the fund, including management fees, regulatory and compliance expenses, exam expenses, or other related costs.
   
   

2. Portfolio company information or fees and expenses that the advisor or its affiliates charge to a portfolio company, including monitoring fees, transaction fees, and any fees going to operating partner groups.
   
   

3. Enhanced performance reporting, showing returns without the impact of any subscription line at the fund level—in other words, how subscription lines or other types of fund level borrowing affect returns.

Kowalski added that the new SEC regulations stem not just from a “greater pressure for more independent verification of data, but also for more detailed information that investors are now demanding be included on their statements.”

Pidgeon added that firms could benefit from leveraging third-party expertise to effectively manage the new audit requirements, which currently apply only to fund advisors registered with the SEC. While many firms can quickly produce a valuation document in minutes, it’s quite a different matter to have a valuation “prepared in such a way that it allows an auditor to go through it properly, laying out your process and your model.” Working with third-party experts, including fund administrators, accounting firms, and legal advisors, means GPs can more easily balance the demands of ongoing operations with the rigors of reporting.

Effective collaboration and communication between GPs, fund administrators, and service providers is essential to compliance and a crucial element in tax preparation and compliance.

The panel discussed what it means to build a partnership mindset within the team of service providers and how firms can achieve it.

As Shanahan and Pidgeon noted, a partnership mindset means breaking down organizational barriers to function as one team working towards a common goal. “Our goal,” Pidgeon said, “as your service provider [is] we want [clients] to have to do as little work as possible.” That means, tight collaboration and communication between the GP and their network of service providers, often with the fund administrator serving as the quarterback.

Pidgeon and Dowolski also offered a few best practices to foster a partnership mindset and help reduce tax season stress, including:

• Requesting an audit and tax request list prior to year-end and scheduling a call for the auditor and administrator to review those items

• Having upfront team conversations to define timelines, roles, and responsibilities and communicating frequently thereafter

• Engaging technology to help facilitate communication and access to crucial documentation throughout the process

The key thing is that this process should happen before entering tax and audit season on January 1st, which is time sensitive and stressful.

With increasing demand from clients and regulators to tackle more, faster, the panel turned its attention to automation–and why it should be a top priority for GPs.

Emphasizing the role technology and automation can play in fund administration, including facilitating communication among stakeholders and streamlining manual workflows, the panel discussed how things like Optical Character Recognition (OCR) technology are being used to automate the splitting, reading, and sending financial documents to investors, reducing manual efforts and saving time. Pidgeon explained, for instance, that firm-favorite tool Data Snipper enables PDF and image searches–even searching “a picture on a napkin that someone wrote notes on.” Moreover, it can “extract information and match it to [a] population.” And it does it fast. As he said, it’s “been a great way to introduce technology.” He also pointed to universal investment lifecycle technologies like Juniper Square that have helped his firm manage end-to-end relationships.

Naturally, given the sensitive nature of client data, data security is featured in the conversation. Commenting on how technology offers controlled data access and sharing without compromising data security, Kowalski explained the three-dimensional approach technology-forward service providers, like Juniper Square, apply when granting access to the official books and records: access is delineated, segmented, and granted based on investment entity.

Kowalski said applying this dimensional approach to data access “really cuts down on a lot of the back and forth that we typically have with the auditors” and has decreased the number of manual procedures required thanks to automation. And that spells an uptick in overall efficiency and security.

Watch the full recording of Making the Most of the Planning Period now.