Hedge Fund Question of the Week – Summer Edition – No. 5

How important is it to maintain a good relationship with the auditor?

Answer:  Very

This may seem like an obvious answer.  But a hedge fund firm often relies on its auditor to provide multiple services, including most notably an annual audit of the funds’ financial statement.  The annual audit is required by the SEC’s “Custody Rule” and also is typically included as a requirement in a fund’s partnership agreement. An auditor might also audit the firm’s financial statements and provide services such as tax advice and return preparation, internal control testing and other consulting advice. 

An auditor’s relationship to the firm is necessarily independent and at arm’s length.  The firm and the auditor, however, are typically working towards a common goal.  According, the firm has a strong incentive to maintain a productive relationship, which can be enhanced through open communication and the timely sharing of relevant information.  The alternative can result in mistrust and unwanted consequences.