Only retain service providers that have specialized knowledge and experience in asset management. You wouldn’t hire a family physician to perform surgery, so why would you hire a general practice accounting firm to conduct specialized regulatory audits? The same rationale applies to your lawyers, administrators, and compliance consultants.
OUR TAKE: Performing audits of registered advisers, broker-dealer, or public companies involves a thorough understanding of the applicable securities laws and accounting standards. Accounting firms should not undertake engagements without retaining a compli-pro that can help navigate the regulatory waters. Advisers and broker-dealers should not retain a firm that lacks a track record of practicing in this area.
The SEC has instituted enforcement proceedings against an audit firm engagement partner for failing to follow professional standards, thereby allowing a venture fund manager to loot the fund by taking unearned management fees. The SEC alleges that the venture fund manager, in order to meet cash needs for affiliates, advanced unearned management fees in amounts that would never be earned. The SEC charges that the respondent and the audit team knew about the unearned fees but failed to fully investigate the payments and further failed to properly disclose the payments in the financial statements. Instead, the audit firm issued unqualified opinions over a 4-year period. The SEC also asserts that the audit partner removed relevant financial statement disclosure when management objected.
OUR TAKE: As a key securities market gatekeeper, the auditor performs a critical control function upon which investors rely. The SEC will hold audit firms and their senior personnel accountable when clients engage in observable unlawful behavior. The same rationale will apply to other gatekeepers including administrators, lawyers, and consultants.