Large Financial Advisory Firm Searches for Audit and Tax Partner to Go Beyond Basic Compliance

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    Large Financial Advisory Firm Searches for Audit and Tax Partner to Go Beyond Basic Compliance

    The Client

    The Firm originated as a provider of financial advisory and investment management services to primarily state and local governments and non-profit institutions. Today, the Firm is a national group of companies consisting of financial advisory firms, asset managers, and a broker-dealer, providing a broad array of products and services.

    The Opportunity

    Several years ago, this $72 million growth-oriented firm was looking to maintain their progression and hone their ability to quickly adapt and respond to changing market opportunities and challenges. The Firm was seeking a new audit and tax compliance partner that could go beyond just providing a basic audit opinion and tax returns. They wanted a partner that could respond quickly to the unique needs of their growth-oriented company and add value as they went through various growth phases, forms of business enterprises, and ownership changes.

    The Solution

    The Firm was initially referred to Kreischer Miller by their industry contacts. They were impressed by Kreischer Miller’s commitment to understanding their business and providing proactive advice and counsel. The Firm decided to engage Kreischer Miller, which was the start of a long-term audit and tax compliance partnership.

    Far beyond meeting all of the Firm’s bank, regulatory, and tax filing deadlines, we demonstrated our commitment to being a long-term partner in areas such as:

    • IRS examination assistance: We assisted management in guiding IRS examiners through the Firm’s accounting complexities, which resulted in minimal adjustments.
    • Tax notices and estimates: By providing ongoing tax advice, consultation, and assistance with quarterly income tax estimates and resolution of tax notices, we kept disruptions to the Firm’s team to a minimum.
    • Financial statement wants vs. needs: Although the Firm wanted separate entity audits, we recognized they were no longer needed and advised them to switch to a single consolidated audit. This led to significant cost savings for the Firm.
    • Education: We helped the Firm navigate and implement changes in the broker-dealer reporting rules, including the agreed upon procedures required by the Securities Investor Protection Corporation (SIPC) and other internal control and exemption reporting requirements.
    • Control recommendations: We provided recommendations to strengthen policies and procedures in areas such as cash disbursements, cash receipts, fixed assets, general ledger entries, and operations matters, including project level time detail, employee timesheets, and client engagement letters.
    • GIPS: We educated the Firm’s asset management team in understanding the Global Investment Performance Standards (GIPS), its impact on institutional investors, and how GIPS compliance could impact the Firm and their ability to generate revenues.

    The Outcome

    Over ten years later, the Firm remains a Kreischer Miller client. Throughout the relationship, the Firm experienced minimal turnover with Kreischer Miller’s audit and tax team. This not only saved the Firm from the burden of having to continually train new staff, but it allowed Kreischer Miller to provide proactive advice and guidance, thanks to our deep institutional knowledge of the Firm.

    Since the beginning of our relationship, the Firm has grown to more than $120 million with offices in more than 25 states, and they are continually seeking more growth. While the Firm’s success sits squarely on their shoulders, Kreischer Miller has made a difference. Our role has gone far beyond merely fulfilling the Firm’s compliance needs. We have served as an advisor and continue to add value as part of our services.

    Wealth Manager Needs Firmwide Investment Reporting Model and Package to Grow AUM

    The Client

    The Wealth Manager is a privately-owned firm that provides investment management, manager selection and monitoring, asset allocation, and other financial services. The Wealth Manager also provides advice to financial institutions and families around alternative investments.

    The Opportunity

    In order to take the firm to the next level, the Wealth Manager knew they had to put significant effort into marketing their investment returns. Because the Wealth Manager had historically focused on providing services that were customized to the needs of each investor, they had not previously looked at returns across strategies firmwide.

    The Solution

    The Wealth Manager decided to seek out a solution that would allow them to more proactively market their investment performance to attract new clients and grow assets under management. The firm reached out to their investment industry contacts, who in turn referred them to Kreischer Miller. Based on our experience with other clients facing a similar dilemma, our proposed solution was to conduct an initial assessment of key issues and future goals and then create a customized reporting package, so that only minor tweaks would be needed on an ongoing basis.

    During the initial assessment, our highly experienced directors and managers worked to gain a thorough understanding of the Wealth Manager’s documentation, current goals, and future objectives. We then met with the firm to outline our assessment of their reporting needs:

    • Strategies covered and the ability to carve-up and/or combine multiple strategies
    • Time period covered and the ability to take snapshots of any timeframe
    • Manager selection and the ability to view individual managers or an aggregate across managers
    • Additional criteria, such as taxable vs. nontaxable and the ability to expand criteria
    • Easy transferability to a clean and organized reporting template
    • The ability to reconcile

    This initial assessment provided the Wealth Manager with immediate feedback about areas that needed greater focus in order to achieve their goals. More importantly, the process provided insight into what other advisors were doing and opened their minds to avenues that were not initially contemplated at the start of the project.

    As the firm continued to gather information and hone their goals and objectives, we served as a resource and helped guide them through the process. Many of the Wealth Manager’s final objectives were tightened and additional objectives were added to save time going forward.

    After the initial assessment was complete, we began the creation of the model and reporting package. Constant communication between the Wealth Manager and Kreischer Miller throughout the process  led to further enhancements and checks and balances. After providing the Wealth Manager with on-site training and instruction manuals, the firm was able to take over the ongoing maintenance of the model and reporting package.

    The Outcome

    As a result of the engagement, the Wealth Manager now has a clean, organized report package to assist in achieving their primary goal – growing assets under management. Working with Kreischer Miller also helped the firm identify and achieve two important additional goals: a new way to review past performance and a flexible model that would grow with them.

    Investment Fees: Are You Charging the Right Amount?

    In today’s marketplace, investment management fees vary widely from one product to another, as well as from one client to another. Fee calculations range from simple to quite complex.

    In their most basic form, management fees are a flat percentage of assets under management. However, investment advisors and clients can often better meet their objectives using more advanced fee structures. To reward clients who entrust them with larger asset amounts, investment advisors often use tiered rate schedules that offer lower fee percentages as the amount of assets under management increase.

    Tiered rate schedules are just the tip of the iceberg, as there are many other factors which may impact fee calculations:

    • Performance fees
    • Investment allocations
    • Waterfall calculations
    • Differing schedules for different clients
    • Aggregation of multiple related accounts for use in a unified tier schedule
    • Rebates for investment in multiple firm funds (some of which may be invested in other firm funds)
    • Most favored nation clauses (where an investment advisor is required to make sure that the client with the clause always gets the lowest fee charged to any of the investment advisor’s clients)
    • Alternate calculations when client contribution and withdrawals occur

    Unfortunately, most mainstream accounting and billing systems are unable to cope with the variety and complexity of an investment manager’s varied fee calculations. Many investment managers utilize spreadsheets, internally developed databases, or one of a few specially designed (and costly) software packages in the marketplace.

    Here are some common calculation errors:

    • Using an outdated fee schedule
    • Using the incorrect tier
    • Not calculating performance fees in addition to base fees
    • Missing or misapplying hurdle, claw back, and high water mark provisions
    • Using the incorrect period for performance calculations
    • Not aggregating all accounts for grouped tier calculations
    • Not handling client inflows and outflows according to contractual terms

    It can be embarrassing for a manager if a client discovers they  were charged too much. On the other side of the coin, investment advisors generally do not like to undercharge, leaving money on the table.

    In addition to carefully considering which systems to utilize, managers should perform procedures to test the accuracy of revenue calculations on a periodic basis. Investment advisors can do this internally or hire a firm to assist in the process.

    One approach is to sample the fees. For the sample accounts selected, the recalculation process generally involves:

    • Obtaining the most current fee schedule
    • Obtaining custodial records to support market values
    • Carefully reading the fee calculation terms as well as any related contractual provisions that might impact fee calculations
    • Recalculating the fee

    For many types of asset classes and clients, this is a relatively straightforward process.  For alternative investment funds, allocation and waterfall calculations generally need to be calculated from the inception of each fund.

    If a manager were to make recalculations once or twice per year, the sample could be rotated so that over a period of time (such as 3 to 4 years), the process would cover most of the accounts. We recommend starting with the most complex accounts that have the greatest probability of errors.

    If errors are found, investment advisors should implement processes and controls to minimize future miscalculations. Investment advisors can also inform their clients that their own systems of controls caught the error, a far better alternative to a client discovering an error that has completely escaped detection by the investment advisor.

    The fee calculation process is varied and complex. Take the time and effort to do it right. It is essential to ensuring you are not leaving money on the table…or upsetting clients unnecessarily.

    We will be happy to provide further information relating to this subject. For more information, contact Thomas A. Peters, Director, Audit & Accounting and member of Kreischer Miller’s Investment Industry Group at tpeters@kmco.com or 215.441.4600.

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    Annual Investment Industry Update

    Thursday, December 5, 2013
    12:00pm to 3:30pm
    DoubleTree Suites
    Plymouth Meeting, PA

    Staying on top of the myriad of changes that impact an investment advisor’s operations can be a challenging task. This seminar will provide you with an overview of current topics and key changes impacting performance reporting, SEC compliance, and accounting & tax issues.

    Join us for a robust agenda of timely topics:

    GIPS Update

    • Newly-issued papers providing guidance for Policies & Procedures and Advertising
    • Impact of new Q&As issued in 2013
    • Overview of Guidance Statements and Working Group projects in process

    SEC/Regulatory Update

    • SEC Enforcement’s aggressive agenda, including auditors and directors
    • Actions against compliance officers and programs
    • Recent best execution cases
    • Hedge and private equity developments, including the JOBS Act

    Tax Update

    • New tax rules for investment income
    • FACTA update
    • Additional recent changes, including the impact of DOMA and the Health Care Act

    Audit & Accounting Update

    • Proposed changes to the auditor model
    • New rules for broker/dealers
    • Key accounting updates impacting investment funds

    Presented by Kreischer Miller and Cipperman & Company.

    Agenda:

    12:00pm – 12:45pm    Lunch and networking
    12:45pm – 3:30pm      Seminar

    Kreischer Miller Recognized as a ‘Best of the Best’ Accounting Firm for 2013 by Inside Public Accounting

    Kreischer Miller was recently named to INSIDE Public Accounting’s nationwide Best of the Best Firms list for 2013. Kreischer Miller is the only accounting firm in the Greater Philadelphia region to be named as a Best of the Best.

    For more than 20 years, INSIDE Public Accounting (IPA) has compiled its Best of the Best list of firms that have delivered exceptional performance, regardless of outside factors. Best of the Best firms stand out as well-managed and well-executed examples of how to succeed, regardless of the economy.

    The recognition honors 50 firms for their stellar management and overall operational performance on more than 70 criteria. More than 500 of the largest firms nationwide participated in this year’s survey, one of the longest-running CPA firm benchmarking surveys in the nation.

    “We are honored to be recognized by INSIDE Public Accounting as one of the country’s best firms,” said Stephen W. Christian, Managing Director of Kreischer Miller. “In a challenging economy, our firm continues to grow as we add quality team members and clients. This success is driven in large part by our commitment to providing exceptional guidance and insight to our clients in helping them navigate changes in their businesses.”

    “The IPA Best of the Best firms represent the pinnacle of high-performing accounting firms in the U.S. Each firm demonstrates the right combination of vision, planning, training, and execution to deliver superior performance,” said Michael Platt, Principal of the Platt Group and publisher of the accounting trade publication, INSIDE Public Accounting.  “We congratulate Kreischer Miller for being a representative of the best of what the profession has to offer.”

    For a more detailed look at the IPA Best of the Best, visit www.insidepublicaccounting.com/PDF/bob2013.pdf.

    Broker-Dealer Update: Recent SEC Amendments and PCAOB Audit Findings

    Broker-dealers operate in a highly regulated environment, which frequently changes. Below are highlights of some key broker-dealer amendments recently adopted by the SEC as well as PCAOB audit findings.

    SEC Amendments

    The recent Securities and Exchange Commission amendments relate to the net capital rule, the customer protection rule, the books and records rules, and the notification rules applicable to broker-dealers under the Securities Exchange Act of 1934. Below are some of the areas affected by these new amendments:

    • Proprietary accounts of broker-dealers
    • Banks where special reserve deposits may be held
    • Allocation of customers’ fully paid and excess margin securities to short positions
    • Importation of Rule 15c3-2 requirements into rule 15c3-3 and treatment of free credit balances
    • Proprietary accounts under the Commodity Exchange Act
    • Expansion of the definition of qualified securities to include certain money market funds
    • Holding future positions in a securities portfolio margin account
    • Amendments with respect to securities lending/borrowing and repurchase/reverse repurchase transactions
    • Documentation of risk management procedures
    • Amendments to the net capital rule
      • Expense sharing agreements
      • Short term capital contributions
      • Fidelity bonding requirements
      • Broker-dealer solvency requirements
      • Temporary restrictions on capital withdrawals
      • Technical amendments

    These amendments will take effect on October 21, 2013. Please review this list for anything that would be applicable to your company.

    For more details on the above topics, please click here.

    PCAOB Audit Findings

    The PCAOB was established by Congress to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. In connection with the passing of Dodd-Frank, the PCAOB also oversees the audits of broker-dealers (including non-public broker-dealers) and compliance reports filed pursuant to federal securities laws to help promote investor protection.

    The PCAOB recently released its report on the inspection results of broker-dealer audits- audits in which a CPA firm provides an audit opinion on the broker-dealer’s financial statements and related reports. There were deficiencies noted in 95 percent of the audits selected for inspection. The most frequently-noted deficiencies were related to:

    • Audit procedures related to the computations of customer reserve and net capital requirements, and
    • Audit procedures related to financial statement areas, including procedures regarding tests of revenue, related parties, and the risk of material misstatement due to fraud.

    For more details about the inspection process and results, click here.

    We recommend that all broker-dealers and their auditors consider their own policies & procedures in light of the PCOAB’s findings. At Kreischer Miller, we assess our audit process on an ongoing basis and will continue to do so with the PCAOB’s findings in mind. This may result in increased audit testing or new audit tests in certain circumstances.

    The SEC and PCAOB have set a rigorous pace for regulating broker-dealers and their auditors.  Please don’t hesitate to reach out to us with any questions or comments.

    We will be happy to provide further information relating to this subject.  For more information, contact Frank L. Varanavage, Manager, Audit & Accounting and member of Kreischer Miller’s Investment Industry Group at fvaranavage@kmco.com or 215.441.4600.

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    Kreischer Miller Exhibiting at CFA Institute GIPS Standards Annual Conference

    CFA Institute GIPS Standards Annual Conference

    September 19-20, 2013
    Westin Copley Place
    Boston, MA

    As the finance industry continues to grow more globally interconnected, investors are increasingly seeking standards of investment performance measurement and reporting that are reliable and comparable across markets. The CFA Institute’s GIPS Standards Annual Conference is focused on the implementation and application of the GIPS standards.

    Kreischer Miller will once again be exhibiting at this year’s GIPS Standards Annual Conference. Stop by and see us!

    More details about the CFA Institute GIPS Standards Annual Conference.

    Are You in Compliance with SEC Custody Rules?

    After the barrage of investment frauds several years ago, the SEC came under intense pressure to update its rules protecting investors. The SEC responded by issuing what is commonly referred to as the “custody rules.”

    The custody rules indicate that if an investment manager has custody of client funds, they fall under the scope of the rules and must follow the rules’ requirements, which generally include that an investment manager (among other requirements):

    • Inquire that qualified custodians send account statements directly to clients and provide notification of this to its clients.
    • Meet audit requirements for any investment funds it manages.
    • Engage an accounting firm to perform a surprise custody examination, which results in an opinion filed with the SEC regarding the investment manager’s compliance with the custody rules.
    • Obtain SSAE 16 (formerly SAS70) reports in certain circumstances.

    The rules are lengthy and can at times be a bit complex.  As such, it was no surprise when the SEC’s Office of Compliance and Examinations (OCIE) issued an alert that identified several significant deficiencies relating to custody issues. These investment manager deficiencies included:

    • Failure to recognize a manager has custody, such as situations in which the manager serves as trustee, is authorized to write or sign checks for clients, or is authorized to make withdrawals from a client’s account as part of bill-paying services.
    • Failure to meet the custody rule’s surprise examination requirements.
    • Failure to satisfy the custody rule’s qualified custodian requirements; for instance, by commingling client, proprietary, and employee assets in a single account, or by lacking a reasonable basis to believe that a qualified custodian is sending quarterly account statements to the client.

    In addition, OCIE discovered that some investment managers that manage investment funds failed to meet the requirements to provide audited financial statements to all fund investors in a timely manner.

    What Does This Mean for Investment Managers?

    The SEC takes the custody rules seriously and OCIE has made these rules a focus of its ongoing process of examining investment managers. Investment managers should take steps to ensure they understand the rules and dedicate resources to comply with them. This may mean consulting with legal and accounting firms to get up to speed.

    What Does This Mean for Investors?

    The bulletin issued by the SEC’s Office of Investor Education and Advocacy (OIEA) describes the requirements of the custody rule, including the requirement for custodians to send account statements to investment advisory clients at least every quarter. The bulletin notes that even though the custody rule provides enhanced protections to investors, it is not a substitute for an investor’s own oversight and monitoring of their investments. As OIEA Director Lori Schock noted, “asking questions and monitoring investments are key ways to protect yourself from investment fraud.”

    Thomas A. Peters, Director, Audit & Accounting can be reached at tpeters@kmco.com or 215.441.4600.

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    Kreischer Miller Exhibiting at PMAR XI

    The Journal of Performance Measurement’s Eleventh Annual Performance Measurement, Attribution & Risk Conference PMAR XI

    May 16-17, 2013
    Ritz Carlton
    Phildadelphia, PA

    Each year, the PMAR conference provides an opportunity for performance measurement professionals to learn about recent developments in performance, attribution, risk, and GIPS, as well as network with peers and gain new insights and solutions.

    Kreischer Miller will once again be exhibiting at this year’s PMAR Conference.  Stop by and see us!

    More details about PMAR XI.

     

    Are GIPS Composite Examinations Worthwhile?

    The Global Investment Performance Standards (GIPS) were created and funded by the CFA Institute to provide an ethical framework for the calculation and presentation of the investment performance history of an investment firm. Many investment firms understand that GIPS verifications are the primary key to gaining access to institutional assets and investment platforms, but wonder if they should also perform composite examinations on key composites.

    Your investment firm may only need a verification, but it may make sense to have some composites or pooled funds examined, as well. You may want to consider:

    • Your clients’ expectations
    • What you are seeing in requests for proposals (RFPs)
    • The questions that consultants are asking
    • What would happen if an error were to later surface in a key composite

    Unfortunately there is a lot of confusion on this topic, and not everyone understands the differences between verifications and examinations. From an investor’s perspective, composite or pooled fund examinations can be very valuable.

    A verification results in an opinion that an investment firm’s policies and procedures have, in all material aspects, been designed in compliance with the GIPS standards and implemented on a firm-wide basis. Verifications do not attest as to whether any specific composite or pooled fund is presented, in all material respects, in conformity with the GIPS. A composite or pooled fund examination, on the other hand, attests whether a specific composite or pooled fund is presented, in all material respects, in conformity with GIPS.

    Why does this matter? Let’s draw a parallel to investment funds. Many funds have their books and records maintained by custodians/administrators that obtain SSAE 18 reports. An SSAE 18 report is performed by a CPA firm and attests to the design and function of the processes and procedures (internal controls) relating to their accounting processing. This is similar to a verification, in that it is process and controls based.  SSAE 18s do not attest whether a specific investment fund’s financial statements are presented in conformity with Generally Accepted Accounting Principles (GAAP).

    As a result, the SEC has mandated that the financial statements of registered investment funds and many unregistered investment funds (managed by SEC registered investment firms) must also be audited. You can think of a financial statement audit as being similar to a composite or pooled fund examination.  For financial statement audits (composite examinations), an opinion is attesting that the financial statements (GIPS reports) are presented, in all material respects, in conformity with GAAP (GIPS).

    Why should investment fund financial statements be audited if the recordkeeping process has already been subjected to an SSAE 18? Why does the SEC require this? Although it is important to have well-designed processes and procedures, this does not ensure the accuracy of the financial statements. Because of inherent limitations in internal controls, errors may occur and not be detected.

    Kreischer Miller audits many investment funds, almost all of which utilize custodians/administrators that have SSAE 18 reports. Each year, our audit process uncovers adjustments to numbers and disclosures of some of the funds’ financial statements. This is normal and does not mean that the accounting processes and procedures are not designed or functioning properly. This also does not mean the SSAE 18 reports were wrong.

    Although extremely helpful, properly designed controls cannot completely eliminate mistakes. Errors happen for a variety of reasons, which is why financial statement audits are useful to a fund’s investors and are generally required by the SEC.

    Composite and pooled fund examinations are similar to fund audits. When performing a composite or pooled fund examination, errors may be uncovered that may not have been detected in a verification. This is also normal and does not mean the GIPS processes and procedures are not designed or functioning properly.

    The SEC’s requirement that investment fund financial statements be audited makes sense. In a similar fashion, composite and pooled fund examinations can be valuable to both investors and investment firms.

     

    Thomas A. Peters, Director, Audit & Accounting can be reached at tpeters@kmco.com or 215.441.4600.

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