Eight Tips for New Real Estate Fund Managers for Preparing an Efficient Audit
- Aug 23, 2022
- Youmna Assad
For real estate fund managers going through audits for the first time, financial statements audits can seem intimidating. Below are eight best practices to make the audit process more efficient.
- Schedule quarterly business update calls with the audit team (typically the audit team should reach out to schedule these) to discuss updates to the fund that have occurred during the year. This would include any new investments or subsequent closings. This will allow the audit team to be current on all transactions and activities and better plan for the audit.
- Hold a planning meeting with the audit team and any other third parties involved (e.g., administrator, property accounting, outsourced accounting) during the third quarter. This will allow all parties to be on the same page in terms of expectations, deliverables, and timing for both the interim and year-end.
- If a significant or an unusual transaction occurred during the year, don’t wait for fieldwork to discuss with your auditor. It’s better to discuss with your auditor right away so that you can gather sufficient audit evidence to support the transaction. For instance, for fund managers who had previously operated on a deal-by-deal basis but have now been organized into a fund structure, they may get permission to transfer the interest in some of those joint venture investments to the fund. In this case, fair value would have to be determined not only at year-end but also the date that the transfer occurs. By discussing this up front with the auditor, expectations can be better understood, and the fund manager can determine fair value either by obtaining an appraisal or other valuation techniques to be used as audit evidence at the date of the transfer—and they won’t be scrambling to put something together months after the fact.
- Establish and communicate expectations to all parties involved. Typically, the audit team will prepare an audit timeline stating all deliverables both to/from the auditor/client and go over the timeline to ensure it is realistic to meet the targeted issuance date. Revisit the audit timeline during the audit to measure progress.
- Schedule weekly calls with your auditor and administrator once fieldwork starts. This will allow the auditor to highlight the most significant open items and what needs to be provided to keep the audit moving forward.
- The auditor will prepare a request list that will then be updated with any further requests or open items. Before spending time preparing support, if you’re not sure about an item, review it with the auditor.
- Discuss your overall valuation policy and each individual investment valuation approach and techniques, including those that changed from the prior year, with the auditors ahead of time. Understand what the auditors will expect as part of the valuation package at year end. This may include a write-up on the investment as well as any valuation models used. The auditors will also expect the information used to support the inputs to these models, such as appraisals, management budgets, discount rates and risk factors, and/or a list of comparable properties used as part of the analysis.
- One of the procedures typically performed during an audit is sending confirmations to third parties. This process involves the auditor requesting and obtaining direct communications from third parties verifying information provided by you during the audit. For instance, on a real estate debt fund, confirmations will be sent to counterparties requesting that they confirm key terms of loans including principal balance, interest rates, interest paid and any other fees (e.g., origination fees, maturities). The auditor will provide the templates and a list of confirmations that need to be prepared and will also mail them, but you will be asked to follow up on any unreturned confirmations in a timely manner. Once the audit begins, request that the audit team send you weekly updates on open confirmations so you can follow up on them and not wait until right before your expected report date. The earlier the confirmations are received the better, so that if discrepancies are identified they can be resolved and not delay the audit completion. When a confirmation response is not received, the auditor will have to perform alternative procedures, which may result in additional requests from the auditor.
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Youmna Assad is a Director in the Real Estate Services Group, with over 15 years of public accounting, serving private companies.
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