Investment advisers worried about surprise audits, says PwC accountant

Many investment advisers are trying to determine whether they will be subject to new audits under custody rules that take effect March 12, according to Chris Thompson, assurance partner in the asset management practice of PricewaterhouseCoopers LLP.
The possibility of new audits is currently the biggest concern for advisers who are subject to new custody rules adopted in December 2009, said Mr. Thompson. The complex rules, which were created in reaction to the massive Ponzi scheme perpetrated by Bernard L. Madoff Investment Securities LLC, require investment advisers to undergo surprise audits if they can withdraw client funds. But different types of audits are required depending on whether custodians that hold assets are affiliated with the advisory firm.
“They have to work through all these provisions to figure out if they’re subject to it and, if they are, which pieces are they subject to?” Mr. Thompson said. PricewaterhouseCoopers conducts the types of audits that will be required of advisers who are deemed to hold custody of customer assets under the new rules.
“If the adviser and the custodian are two different parties, all the adviser has to do is worry about getting the count done and making sure that statements are being sent from the custodian to the client,” Mr. Thompson said.
If custodians are affiliated with an advisory firm, account statements must be audited to ensure that client assets and trades are as the adviser has reported them, and advisers will have to get a control report done as well, he said. Two types of audits can be done to verify assets, an SAS 70 or an AT 601, which is generally less expensive. “It’s all about counts, control reports and statements.”
Some advisers who act as trustees and are deemed to hold custody under the SEC’s rules may be reconsidering whether to continue to act as trustees in order to avoid the expense and work it takes to go through the audits, Mr. Thompson said.
“The advisers will have to contemplate if the service is worth the cost of being subjected to an exam and having the right structure,” he said.
However, PricewaterhouseCoopers is not aware of many advisers’ changing their trustee relationships with their clients yet. “We’re not hearing that a lot,” he said. “What we’re really hearing is that it’s complex.”
It is as much of an effort for advisers to determine whether or how they are subject to the rule as it is for them to prepare for it, he said.