The Benefits of an Audit of Your Registered Investment Advisor

By Barry Goodman

June 13, 2017

Over the past few years, we have witnessed continued interest in mergers, acquisitions and consolidations of Registered Investment Advisers (“RIAs”). Acquisitions of RIAs are motivated by higher management fees with the growth of assets under management (“AUM”), the possibility of incentive fees revenue, diversification of asset base, and the potential for expense reduction.

According to several industry sources, over 2015 and 2016 there were approximately 51 transactions with $1 billion plus in AUM. Private equity firms were the largest acquirer of RIAs, followed by banks, then other groups such as independent broker dealers or other RIA’s.

This wave of activity has allowed acquirers to add stable, sustained cash flows to their existing revenue stream. Established investment advisers with a history of 10 years or more represent the majority of the merger and acquisition targets. For investment advisers, the focus will be on the quality of the investment team, infrastructure (front office, back office and accounting), sustainability of strategy, stability of revenues, growth rate of AUM, and length of track record.

RIAs are required to maintain true, accurate, and current books and records that may be examined by the Securities and Exchange Commission (“SEC”) staff. Principal owners of RIAs with $1-3 billion in AUM often ask whether they need to have their books and records independently audited? Is it worth the economic burden?

It is important to note that having an audit of the RIA provides reasonable assurance that the financial statements of the RIA are free from material misstatement. A rigorous audit process will also identify areas where the RIA may improve their controls or processes, further adding value to the RIA by enhancing the quality of its business processes.

Steven Kops, Mazars USA LLP Transaction Services Partner, who advises on many merger and acquisition transactions of RIAs, agrees that having GAAP financial statements for a RIA reduces transaction timing considerably. Mr. Kops says, “By having an independent audit of the books and records many of the common reporting issues such as keeping cash basis books and records or revenue recognition issues are mitigated.”

There are other reasons for an audit other than an eventual transaction. For RIAs that are publicly traded, an annual audit is required by the SEC. In addition, certain investment advisers have a contractual requirement per their organizational documents to have an annual audit by an independent auditor. An audit may also be requested by investors, partners or shareholders of an investment adviser.

We are Mazars

Mazars USA LLP can assist investment advisers with a suite of services such as audits, custody counts, tax services, due diligence on potential transactions, financial advisory services, cybersecurity assessments, AML reviews, SOC1 reporting, etc. (some services may not be offered to attest clients under independence considerations).

Although currently there is no statutory requirement to have a financial statement audit for investment advisers that are not publicly traded, all advisers are subject to complex and ever changing rules. The best practice is to work with a professional services firm that has deep experience in the industry.


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Disclaimer of Liability

The information provided here is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

Mazars USA LLP is an independent member firm of Mazars Group.

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