What Documents Do You Need for a Hedge Fund Audit? - Michael Coglianese CPA, P.C.

July 06 | News

What Documents Do You Need for a Hedge Fund Audit?

“We’ll paper the valuation later” is how a February audit becomes a June one, and we’re pressing harder on this…

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Every year we send your fund the same long document request, and every year you can pull most of it in an afternoon. You’ve done this before. You know where the general ledger, the bank statements, and the LPA all live.What slows an audit down is the two or three documents that don’t agree with each other, and how late you tend to find out.A hedge fund audit is really just us refusing to take your word for anything. We check your numbers against everyone else’s records, your administrator’s and your custodian’s, and the banks’ and the counterparties’, until it all checks out, or you can tell us why it doesn’t.So the documents are the easy part. Getting them to line up is the audit, and a handful reliably don’t. This is what we ask for, and where the time goes.

Which Governing Documents Do We Need First?

We start with the papers that set the fund’s rules: your partnership or operating agreement, the offering memo, and your subscription and redemption paperwork. They tell us the fees you can charge, how profits are split, and when investors can leave.Then we ensure your financials tell the same story. Usually, they do, but side letters are where it tends to come apart.Say you gave an early investor a break on fees to get them to commit, wrote it into a side letter, and moved on. If your administrator never got a clean copy, your books charge the standard rate while the letter says otherwise, and we have to stop and sort out which one is real.Send us every side letter on day one. It’s 10 minutes that saves a week, and it’s the thing funds forget most.

Which Accounting Records Have to Reconcile?

This is where most of the audit happens. Your administrator produces the official numbers, the NAV, the trial balance, the capital accounts, the bank reconciliations, and you keep your own version alongside them. The whole job is getting the two to agree.When they already agree, we move fast. When they don’t, that gap is the hedge fund audit, and closing it line by line in March is the scramble you were hoping to skip.There’s a deadline under that pace. The custody rule’s audit exception, Rule 206(4)-2, gives you 120 days after year-end to get audited, GAAP-basis financials to investors, 180 for a fund of funds. Miss it, and you lose the exception.So settle one thing early: GAAP or tax basis. The exception requires GAAP, and it runs straight into your K-1s, so decide it at launch, not mid-fieldwork.

How Do We Check Investor Capital and Fees?

Fees sit where your rule book meets your books, so they get their own look. We take your capital account statements, your subscription and redemption records, and your fee calculations, then rebuild the money to confirm every investor got the right slice.The incentive allocation is usually where something slips. If your high-water-mark reset or performance fee doesn’t trace cleanly back to what the LPA promised, we keep pulling until it does.The allocator running diligence on you next year checks the same thing. Getting it clean now pays you twice.

What Proves Your Holdings and Valuations?

We check what you hold against your custodian and prime broker statements, your trade blotter, and your holdings reports, and test your prices against your valuation policy. Anything exchange traded is easy, since the price is right there.The hard part is whatever you marked yourself: side-pocketed positions, private credit, a token nobody’s trading, restricted stock. Each one needs an ASC 820 memo showing how you reached the number.“We’ll paper the valuation later” is how a February audit becomes a June one, and we’re pressing harder on this than ever before. Write the memo the day you put the trade on, while the reasoning is fresh. Rebuilding an illiquid mark from memory in April, under our questions, is slow, and it looks worse than it is.

What Do We Confirm Without You?

Some of it you never touch. We write straight to your banks, brokers, counterparties, and lawyers to confirm the balances, and we only need your service agreements and a signed representation letter from you.Your part is to authorize the requests and stay on whoever’s slow. A law firm sitting on a confirmation for three weeks is a silly reason a finished audit slides into May.All of it counts only because the audit comes from an independent firm rather than your own sign-off. Regulation S-X sets that line, and the exception requires a PCAOB-registered auditor. The cheaper shop that isn’t registered stops being cheaper the moment it doesn’t satisfy the rule.

Why Bring This to Us

An audit moves fast when your books already line up. It stalls on the same handful of things: a side letter your administrator never saw, a fee that won’t foot, a mark you never wrote up.After more than 30 years of these audits, we know to check those first, and we check them in December, when you’ve still got room to fix what we find.Michael Coglianese, CPA, P.C. is PCAOB registered, so the opinion holds, and small enough that a partner picks up when you call, at a fee scoped to your fund. And since those numbers become your K-1s, a clean audit makes the tax season after it easier too.Send us your governing docs, your latest NAV, and your trial balance, and we’ll find what won’t reconcile while there’s still time to fix it. And as always, if you have any questions, talk to one of our experts.

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Michael Coglianese CPA, P.C.
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