In private equity audits, a key area of focus is understanding the investments a fund holds and the structures through which it owns them. One of the most essential audit procedures for this purpose is the independent confirmation process, which allows auditors to verify a fund’s ownership position across its portfolio companies confidently.
ISA 505—the International Standard on Auditing 505, issued by the International Auditing and Assurance Standards Board (IAASB)—specifically governs the use of external confirmations in audits. Under ISA 505, auditors obtain confirmation evidence directly from third parties, such as portfolio companies, to verify information relevant to financial statements.
With respect to private equity audits, the confirmation process is especially relevant for verifying complex and sensitive data. This includes portfolio capital structures, ownership held across different instruments, and entities, and amount of paid and accrued interest on coupon bearing instruments like preference shares and loan notes. However, confirmation processes often face significant challenges, including inconsistencies and delays.
The Traditional Confirmation Process and Its Limitations
ISA 505 outlines a structured approach for auditors to request external confirmations directly from third parties—e.g. portfolio companies, administrators, or custodians—to substantiate ownership positions. For example, when auditing private equity funds investments, auditors typically send email confirmation requests to portfolio companies to verify details like capital structure, number and classes of shares, loans and accruals, and investor ownership percentages. However, traditional confirmation processes can be prone to errors and discrepancies for several reasons:
Lack of Responses and Delays: One of the most common challenges auditors face is a lack of timely responses from third parties. Portfolio companies may delay their responses due to competing priorities or limited resources, which could affect the audit deadlines.
Manual Effort and Coordination Burden: Managing confirmation requests manually can be a labor-intensive task. Auditors often need to individually prepare, send, track, and follow up on responses, which requires considerable time and focus. This becomes a bigger challenge when working with multiple portfolio companies or large datasets.
Inconsistent Information: Portfolio companies may interpret and respond to confirmation requests differently, leading to discrepancies that need clarification, and ultimately, delays. Further, the data held by the fund and portfolio company may not match, or the auditability of that information may prove difficult if underlying support and documentation is not readily available.
Solving the Challenges with a Centralized Cap Table Management Tool
To address these challenges, a centralized tool like DealsPlus can streamline the confirmation process by allowing both funds and portfolio companies to independently confirm cap table data on a regular basis. This approach enhances accuracy, transparency, and efficiency, providing auditors with a clear audit trail that records all changes and approvals, complete with timestamps.
In DealsPlus, each structure and cap table event is systematically captured and supported by underlying documentation, validating the authenticity of every transaction. The platform also provides end-to-end auditability for all calculations and structure charts, ensuring a seamless flow of data into the funds’ valuation models.
A system like DealsPlus provides for the following:
Defined and Focused Audit Scope: DealsPlus enables automated approvals by portfolio companies on ownership structures and cap tables, which can be set up on an ongoing basis—quarterly, annually, or as needed. This ensures stronger controls and enhances the validity of the fund’s quarterly valuation processes. Detailed audit logs, verification workflows, and supporting documentation provide additional assurance.
With DealsPlus as a single source of truth, the scope for Tests of Controls and Substantive Procedures can be defined more quickly and with greater precision, facilitating a more focused and efficient audit process.
Reduced Manual Effort through Automation: With DealsPlus, auditors can rely more heavily on automated controls throughout the process, significantly reducing the need for substantive procedures and minimizing the burden of manual tracking and follow-ups. This allows auditors to focus on analysis rather than administrative tasks. All ownership data points are fully traceable and auditable in one centralized location.
Data Consistency and Standardization: DealsPlus standardises investment and capital structure data sets, formats, and processes across portfolio companies, incorporating automated validations, checks, and calculations. This alignment greatly reduces inconsistencies and minimises the need for clarifications, ensuring that all data consistently meets audit standards.
By leveraging a private equity focused cap table management tool like DealsPlus, private equity fund auditors benefit from a more efficient, reliable, and accurate audit and confirmation process—enhancing both the quality and timeliness of audits. Most importantly, DealsPlus provides auditors with significant assurance on the validity and completeness of the data.