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Centri’s Curtis Farrow Featured in Accounting Today: Hedge Funds, PE Firms, VCs Face New Audit and Reporting Mandates

Centri’s Curtis Farrow, Managing Director and Private Equity & Venture Capital Practice Leader, is featured in an Accounting Today article: Hedge Funds, PE Firms, VCs Face New Audit and Reporting Mandates. Within this article, Curtis shares his thoughts on how the Securities and Exchange Commission’s (SEC) new rule on private fund advisors will affect disclosure and audit requirements for private equity firms, hedge funds, and VC firms.

The SEC’s new rule will require these funds to disclose more information about their fees, expenses, and performance and will require the annual financial statement audits to be distributed to investors for each fund they advise. This requirement was formed to protect investors against the misappropriation of fund assets. This rule is similar to the SEC’s custody rule, which already requires the disclosure of much of this information but does not compare in scope.

For many accounting and auditing firms, these new requirements are nothing new; most large firms provide these services and have auditing practices that are already in line with the new rule.

Curtis weighs in on what this new rule may mean for the industry in the future: “From what I’ve seen, most of these funds were already getting audits. But where I see this going is the scrutiny over those audits is likely to increase over time, just as things do when you start with regulation, and then it evolves and goes from there. The scrutiny for the auditors is likely to increase, especially if at some point these end up being PCAOB-type audits, then that would drastically increase the amount of scrutiny and the level of involvement from the audit firms, the funds and then any providers like us at Centri that assist the management teams in getting through their audits.”

The new rule has garnered significant pushback from industry-related associations, who collectively filed a lawsuit against the SEC to challenge the rule. The rule is also placing more pressure on the reporting of quarterly statements, requiring the disclosure of a fund’s expenses and fees and their impact on performance in more detail. Alongside this, a statement on the methodologies of calculations, fees, and payments will be required, something that hasn’t been required previously.

This new rule may influence how funds are structured, as Curtis explains further: “The additional reporting and disclosures around their fund expenses, and any side letter agreements and things of that nature are probably going to be more impactful and may cause some funds to restructure and reallocate how they do those expenses.”

These changes come with an upside beyond protecting investors. Audit firms will have the opportunity to provide new services and help reconcile quarterly and annual statements of funds to guarantee that the information shared with investors quarterly matches the annual reports.

The SEC’s new rule will have a variable implementation period depending on the size of the firm’s private fund assets. For those over $1.5 billion, the implementation period will be 12 months after publication in the Federal Register, and for those under $1.5 billion, the period is 18 months. With the adoption of these new requirements, funds will come under more scrutiny in their filings and reports, and managers who do not possess in-house audit capabilities will look for external partners and accounting firms to ensure they are meeting the SEC’s regulations.

As a result of these amendments, many fund advisors will need to transform their practices and implement new operational and management changes. At Centri, we have experience helping private equity firms and their portfolio companies navigate the changing regulatory landscape. Our cross-functional teams understand the impact this will have on the level of support required for accounting and portfolio valuation, and the internal controls over these procedures. We can partner with you and your advisors to navigate these new requirements successfully. Contact us to learn more.

Curtis Farrow

Partner | Private Equity & Venture Capital Practice Leader | CPA, ASA

Curtis is a Partner at Centri Business Consulting and the leader of the firm’s Private Equity & Venture Capital Practice. He has more than 11 years of experience and has supported many clients in achieving their growth initiatives in connection with M&A, capital raising, reorganizations, and carve-outs, as well as successful liquidity events for stakeholders via IPOs, de-SPACs, reverse mergers, and other M&A transactions. Curtis joined Centri in November 2019, where he combines his strong expertise in business and intangible valuation with his knowledge of accounting to identify, address, and resolve business issues for investors and entrepreneurs.. View Curtis Farrow's Full Bio