Best Practices for New Real Estate Fund Managers to Prepare for an Efficient Audit
November 01, 2019
By Tami Davidman
For funds going through it for the first time, a financial audit can seem intimidating. Below are some best practices to make the audit process more efficient.
- Schedule a call with the audit team and administrator during the third quarter. This will allow all parties to be on the same page in terms of deliverables and timing for both interim and year-end procedures.
- Hold a meeting towards the end of the third quarter to discuss updates to the fund that have occurred during the year. This would include any new investments or any capital closes.
- If 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 up-front 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 will be able to obtain an appraisal or other audit evidence at the date of the transfer and won’t be scrambling to put something together months after the fact.
- Set up 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.
- The auditor will prepare a request list which will then be updated with any further requests or open items. If you’re not sure about an item, before spending time preparing support reach out and go over it with the auditor.
- Discuss your valuation policy 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, 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 and interest rates. The auditor will provide the templates and a list of confirmations that need to be prepared and will also mail them out, but you will be asked to follow up on any of the confirmations not returned timely. 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 hold up the audit completion.
The most important thing is keeping open lines of communication. The more that things are discussed up front, the less surprises there will be during fieldwork and the smoother the audit process will be.