Audit readiness for funds and portfolio companies

The role of the Chief Financial Officer (CFO) and finance teams has become increasingly complex in recent years. In addition to their traditional responsibilities of managing financial reporting and controlling costs, finance teams must now navigate a rapidly changing regulatory environment and maintain a strategic outlook while still meeting the demands of day-to-day operations.

As the regulatory environment and the demands placed on CFOs and finance teams continue to evolve, the annual audit process requires an increasing amount of resourcing and documentation to manage and maintain.

Audit procedures and requirements

When auditing a private equity fund or a portfolio company, there are a variety of audit requirements that auditors must adhere to. These requirements are put in place to ensure that the audited group is in compliance with regulatory requirements and that the financial statements accurately reflect the entity’s financial position.

While the key focus of any audit will be to ensure that the audited financial statements are prepared in accordance with international financial reporting standards (IFRS) or generally accepted accounting principles (GAAP), auditors must carefully review a number of related aspects to ensure the adequacy of the group’s controls, compliance and governance procedures. The adoption of technology can play a significant role in assisting CFOs in establishing a strong and robust controls framework.

  • In addition to accounting compliance, auditors must also review the internal controls environment. This involves assessing the effectiveness of the internal control systems, which are designed to ensure the accuracy and completeness of financial reporting. Auditors will typically assess the design of the control systems and test their operating effectiveness to ensure that they are working as intended.
  • Furthermore, auditors will review the fund’s ownership positions in its portfolio companies, including the most up-to-date group structure charts and cap tables from each of the fund’s portfolio companies. Portfolio companies would also be requested to provide evidence of changes to the share capital and shareholder loans financing. Given the material assets of any private equity fund is likely to be highly illiquid in nature, auditors will take a close look at the framework adopted in valuing portfolios. 

In addition to the accounting data, auditors will request examples of the following to support their evaluation of the group and individual entities:

  • Transaction documentation, such as investment agreements, shareholder and management agreements, and purchase and sale agreements.
  • Valuation reports, independent appraisals, and supporting documentation as well as support for inputs and assumptions included in the model.
  • Legal documentation, such as articles of association, by-laws, and board resolutions.
  • Tax compliance documents, including tax returns, tax assessments, and correspondence with tax authorities.
  • Evidence of strong entity-level controls, risk & regulatory environment, reviewing funds and portfolio companies’ compliance with the regulations and industry standards. 

How technology can help reduce the noise and labour during an audit process

Technology can help the CFO and the finance teams by reducing the burden of repetitive and time-consuming tasks, allowing them to focus on high-value decisions that require significant judgement. For example, a platform like DealsPlus offers a system of record for tracking legal entities, cap tables and ownership registers, compliance obligations, and a connected data room assuring that all necessary information is kept up to date. By leveraging technology, finance teams can dedicate their efforts towards strategic activities and focus on the key value drivers.

If you would like to learn more about DealsPlus and what we can do to help you stay audit-ready, please click here to reach out to us.