HEDGE FUNDS
AUDIT SERVICES
Green & Company CPAs, LLC (GreenTraderFunds), our CPA firm offers audit services to all types of U.S. (domestic) hedge funds; including securities, commodities/futures and Forex. We also provide audit services to international (offshore) incubator funds.
GreenTraderFunds also provides most of the other services a hedge fund needs. Including but not limited to: assistance with registration and development (formation); accounting and software; tax planning and compliance; and operations and regulatory compliance.
The good news is that for some smaller domestic hedge funds,
we can do it all, including audit plus accounting.
However, we can’t do audit plus accounting for domestic
hedge funds that are registered with either the SEC or CFTC, as their
“auditor independence” rules are stricter than the AICPA rules.
If your commodity pool is exempt from registration, or if you as a securities
investment advisor fall below SEC registration requirements, then we can
perform both audit and accounting services under the AICPA auditor independence
rules.
Audits can only be performed by independent/outside audit (CPA) firms.
All types of hedge funds and incubator funds, domestic or international,
need to file annual tax returns based on accounting results. So all hedge
funds need tax and accounting. However, not all funds need to engage outside
vendors for these services and some can perform these accounting and even
tax functions in-house. Tax is usually too difficult for in-house, unless
you are a large hedge fund.
But if you require an audited financial statement, you must engage an outside CPA firm and you can not generate audited results in-house. Keep in mind that audits can be expensive, especially in the current marketplace of few qualified vendors and the proliferation of hedge funds. Many CPAs have left audit firms to join hedge funds, so there is also a brain drain at CPA firms.
So the first big question should be – Does your hedge fund
and/or management company even need an audit?
There are many misconceptions in the marketplace about this question and
many clients mistakenly believe they must have an audit when in fact it’s
often a “self imposed” requirement.
Current NFA rules require non-exempt commodity pools (funds)
to have annual audited financial statements.
Incubator commodity pools don’t have paying investors (the manager
does not receive compensation, only expense reimbursement), so they are
exempt from NFA rules; and they don't need audited financial statements.
Otherwise, the current registration deminimus test is $400,000 of investor
money paying compensation to the manager and/or 15 paying investors. Commodity
pools who do not meet an exemption, are required by the CFTC and NFA to
provide their investors with annual audited financial statements; including
performance records generated and audited in accordance with strictly
defined NFA rules.
Click
here to visit the CFTC Web site to learn more about the exemption
rules for CTAs and CPOs..
Only SEC-registered investment advisers must have audited financial
statements of their hedge funds by law.
Remember, that securities are regulated by the SEC or your state(s), whereas
commodities and futures are regulated by the CFTC and NFA.
As a securities investment adviser, if you have more than $30,000,000
under management, you must register as an investment adviser with the
SEC. If you manage under $25,000,000 of investor funds, you may not register
with the SEC and you may or may not have to register as an investment
adviser with your home state (and possible other states too where your
investors are located).
Some states are very strict (like CA and UT) and they require registration
if you have just one investor compensating you for managing their funds.
Other states have deminimus tests like the NFA, but their hurdle levels
vary greatly.
Some states (like CA, UT and others) require a state-registered investment adviser to have audited financial statements for their management company, but usually not their underlying hedge fund. This is often referred to as a “seed fund” audit, which attorneys may request from the manager for being included in the hedge fund offering documents.
In summary, exempt commodity pools and non-SEC issuer hedge funds don’t need audited financial statements as a matter of regulatory requirement. For other business reasons, they may still want to have audited financial statements, but it's a “self-imposed" and not a legal requirement.
This begs the question, if you don’t need an audit of your
hedge fund as a matter of law,
why would a manager self-impose an audit on their fund?
Although there are many good business reasons why a manager may want to
self-impose an audit onto his fund, we have found that many managers didn't
realize they could skip an audit and they regret learning this later on.
Again, audits can be expensive, time-consuming and restrictive, so unless
your investors demand this value-added service, you may want to forgo
audit services.
Here are some good business reasons to have an audit even though
they are not required by law.
If you plan to soon have institutional investors in your hedge fund, its
important to understand that institutional investor due diligence checklists
require a careful review of audited financial statements. These more sophisticated
investors - many of who do not have personal relationships with you like
friends and family - require the added assurance provided by respected
outside audit firms. Institutional investors also include Fund of Fund
hedge funds, trustees representing retirement plan assets and family offices,
brokers who will raise institutional money for you and more.
But there is also a large universe of smaller and start-up hedge funds that don't have a reasonable chance to raise money from institutional investors at the outset (and for a year or two). These smaller funds succeed by raising money from 'friends and family' of the manager. Many of these close investors won't insist on audited financial statements, so if by law you can skip an audit of the fund, why not consider doing so? Your friends and family know and trust you and they may be satisfied relying on your annual tax filings with the IRS. Some managers also provide interim accounting reports to their investors, prepared by reputable accounting firms.
Whether or not to engage an auditor from day one in your hedge
fund is a judgment call.
We suggest that you address this question along with other start up questions
in a 60 minute initial consultation with our CPAs and attorneys. As we
indicated on our overview
page for hedge fund services, it’s a tail of two cities when
it comes to launching a hedge fund business plan.
Pedigree managers (from large funds, brokers and banks) starting a new hedge fund for themselves can reasonably expect to attract institutional investors from day one. Plus they plan to use the largest prime brokers. Even if they decide to form an incubator fund first – breaking down the development process into two phases – they need to self-impose an audit on their hedge fund from day one to meet the investment-criteria of their targeted institutional investors. These pedigree managers also expect to grow fast in asset size, thereby requiring registration with the SEC or CFTC; which then makes an audit mandatory by law.
This is a big contrast to start-up funds whose managers lack industry-pedigree. That includes many of the successful online traders who utilize the services of GreenTraderTax. These traders turned managers want to test the waters for a hedge fund business and often they choose to start with a GreenTraderFunds Incubator Fund. Most of the capital in the incubator funds belong to the managers immediate family and sometimes there are also some non-fee-paying outside investors (close friends and family). In this case, why self-impose an audit (with related high costs) onto the underlying hedge fund? Good tax and accounting services from a respected CPA firm like GreenTraderFunds is most likely all that is needed.
You may have to catch up with audits later on.
If you grow and prosper with a strong unaudited performance record, you
may successfully grow to become a candidate for institutional investors.
At that point, you will need to have audited financial statements for
the current and future years. Institutional investors may or may not agree
to also consider your historical unaudited results.
You can ask an auditor to review more than just the past 12-month period,
but understand that current audit industry best-practices only allow audits
for a maximum 12-month period. That means that if you want a longer prior
period to be audited, the CPA firm can issue a multi-year audited financial
statement, but the auditor must perform an audit for each of the prior
years separately. In that case, you only deferred audit costs and did
not save them permanently. It all depends on what the institutional investors
will request and its possible to save on prior year audit costs permanently
too.
If you grow to require registration with the SEC and/or CFTC, then you
only need an audit for the current registration period, not the earlier
unaudited periods.
How we can help you make the right decisions up front.
When you sign up with us for a one hour consultation, our CPAs and attorneys
consult you on your hedge fund and investment management business plan,
including development, registration, tax, accounting, audit, operations
and compliance.
First we determine if you will have to register with the SEC and/or CFTC; in which case, you must have an audit by law. If neither registration is required, and you don't plan to raise money from institutional investors any time soon, then you probably can forgo audit services to a later year. In these cases, its best to sign up with GreenTraderFunds for accounting and tax services. When you want to self-impose an audit on your fund (for instituational investors), GreenTraderFunds can probably also perform the audit, if you still won't be SEC or CFTC registered (in which case we can't do accounting and audit - just accounting and tax or audit and tax).
Note that some conservative attorneys recommend that you self-impose
audited financial statements on your hedge fund if you accept non-accredited
investors into your fund. Some states require "seed fund" audits
for the management company (not the fund) when dealing with non-accredited
investors.
Offshore incubator funds.
Offshore incubator funds are primarily set up to manage money for U.S.
retirement plan assets; to be a "UBIT blocker" (to avoid "unrelated
business income tax" on the U.S. retirement plan). Offshore incubator
funds also attract offshore friends and family. Consider that many new
fund entrepreneurs are living in the U.S. and their friends and families
are living outside the U.S.
Cayman Island and BVI fund authorities in most cases require audited financial
statements from offshore incubator funds and all hedge funds. U.S. retirement
plan asset trustees also want an audit for offshore incubators, even if
the offshore regulators do not require it. So audits for offshore incubator
funds are almost always needed.
GreenTraderFunds, as a U.S. CPA firm is permitted by both Cayman and BVI
authorities to perform the audit function for offshore incubator funds.
Books and records (financial statements) are kept in U.S. dollars and
according to U.S. GAAP (accounting & audit procedures). GreenTraderFunds
can also do the accounting for offshore (exempt) incubator funds in Cayman.
Year-end audits and pre-audit engagement
services.
Year-end audit fees are hard to estimate and they are entirely dependent
on the level of complexity in your hedge fund business. We can't cut any
corners in our audit work and we must do a full and proper job in accordance
with auditing standards. Our job has been expanded in recent years with
our need to look for fraud (SAS
No. 99 – Statement on Auditing Standards No. 99, Consideration
of Fraud in a Financial Statement Audit Summary) – a difficult undertaking
in this environment of scandals in the mutual fund and hedge fund industries.
Before we accept a new audit client, we require a "pre-audit engagement"
intended to: allow us sufficient time to review your operations; conduct
initial due diligence and back ground checks; compare your operations
to your hedge fund documents to determine if you honored your documents;
to determine if your accounting is correct; determine if you are properly
registered as an investment advisor, if you need to be; and to feel comfortable
that a clean audit opinion is a reasonable goal. If we determine that
there are significant problems or concerns for us to accept your full
audit engagement, we will decline the audit. Sorry, but the pre-audit
engagement retainer is not refundable. If we accept the full audit engagement,
the pre-audit engagement time and work is fully useful and it's not wasted
money on your part; we need this work for the audit process. If we decline,
at least you will know what problems you have and you can work to rectify
them as best you can.
How to lower your audit fees
Here are some factors that may reduce the amount of audit work we must
perform and the related fees it will cost: how many items you have on
your balance sheet; the number of accounts you have; how many different
types and numbers of transactions you have; what kind of internal controls
you have; how many investors you have; if you keep open positions at year
end; if you trade complex vehicles such as derivatives; if you use margin
and debt; and more.
If you have any questions about our hedge
fund audit services, please call
us or e-mail us at info@greencompany.com.
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Testimonial
-----Original Message-----
From: Sxxxx Dyyyy [mailto:sxxxx@Dyyyyy.com]
Sent: Thursday, April 01, 2004 12:26 PM
To: 'Robert A. Green, CPA'
Subject: RE: Dxxxx audit and tax work done & Invoice
Robert: Your bill has been submitted to Pxxx Myyyy for LOA and payment authorization. They are usually pretty quick.
Thanks for all your hard work. You’ve got a good group of professionals over there that I’ve enjoyed working with.
I would also like to talk to you or one of your staff about setting up a Mini-401(k) for Dyyyyy. I just need to get educated about what steps I need to take (do I just take a payroll deduction and is it pre-tax, 401(k) administrators etc.). Call me after the 15th.
Sxxxx