I thought I (Frank) would take the blog this week as Bob is working on the tax return for one of the hedge funds that I so easily audited because everything is “immaterial.”   I do feel bad because while my audit went fairly well (I will tell you why in a minute), Bob is buried trying to properly allocate the income to all the partners.  And this fund has it all: contributions of assets, basis adjustments, distributions, foreign partners exiting… You name it, it’s there.

socksIn performing an audit of a fund, it is important for the auditor to not only understand the internal control structure over the financial reporting but to determine if some sort of reliance can be placed on it to be able to minimize testing and thus overall cost of the audit.  When a fund uses an outside administrator to process its transactions, the auditor needs to understand and document the controls at the administrator and then test those controls.  If the administrator provides these services to several funds (which is typically the case) it would be cost effective to have a report on the administrator’s controls that can be used by all auditors of funds. This ultimately eliminates the duplication of work and reduces the cost of the audit.

It so happens that such a report exists, which can be furnished  by fund administrators to help minimize the work of the fund auditors. This internal control report over financial reporting is called a “Service Organization Control (SOC) report.  The internal control audit is performed by CPAs on the controls in place at a Fund Administrator, in accordance with the Statement on Standards for Attestation Engagements No. 16 (SSAE 16). This replaces the old Statement on Auditing Standards Report No. 70 (SAS 70).  I did my first SAS 70 audit in 1992 when the standard was issued.  It was also the last one I ever did.

When I am asked by Fund managers what is the one thing they can do to help increase my efficiency on the audit (in other words, how they can help reduce the fee), I tell them to use an administrator that has a SOC report.   It can greatly reduce my time on an audit while allowing me to feel comfortable that the financial statements are accurately prepared.

While SOC reports are helpful, they are not brief by any stretch. Lucky for me, just as I rely on Bob to make sure the taxes are prepared correctly, I rely on another one of my partners, Tony Chapman, to help me decipher the issues noted in the reports and their affect on my reliance on the report. Tony performs these types of engagements all year long and is probably one of the top authorities on SOC reports.  While our managing partner may go sockless at times, Tony always has a spare SOC around.

More info HERE.


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