How Funds Can Accelerate Growth with Data-Driven Audits

We are in the fourth quarter of the fiscal year, which, to many, is a painful time in the back office as the year comes to a close and annual audit preparations are underway. In a recent webinar, we sat down with experts in fund administration, fund audit, and venture capital. We discussed the role of audits, lessons learned best practices, and trends in the market today.  

Preparing for future growth and compliance

The role that the fund audit process plays in setting the stage for growth is invaluable according to our experts. As emerging funds are looking to attract sources of capital from institutional investors, there’s a need for increased transparency to finances and operations. According to Bryan Gendron, Partner at Frank Rimerman & Co: “We typically will see [an audit requirement] built into the LPA document. There'll be a quarterly requirement for unaudited financials to be presented to their investors and then an annual audit typically due within 90 to 120 days after the year-end. One other place where it may be a requirement is if they have a working capital line for the fund-- there might be a covenant for that line to have an audit performed as well."

Some funds may elect to perform audits early on, given the value in providing consistent transparency over their performance metrics. Setting up reporting and data integrity processes during the first fund will help the due diligence process for the second and third funds. In fact, some firms may find that while an audit was not needed in the first round or two, the third round may require a retroactive audit, creating extra work and headache.

Supporting investor confidence, especially in smaller firms or for those going after institutional investment, is another critical first step. Jared Broadbent, Founder at Strata Fund Solutions, said: “An audit helps an investor to see that there are controls and processes in place at a firm. It's not just in the back of an envelope. You've got an actual financial reporting process that can pass muster, and when you have an auditor in there, it gives them greater confidence.”

How firms can work towards a smooth audit process

Data collection takes the bulk of the time, said Sabya Das, Partner at Moneta Ventures. “What we've been doing last year and this year is around data gathering and understanding our entire portfolio in terms of complete up-to-date understanding of the financings they've done, our true ownership and the supporting documentation. That has definitely been one of the big pain points for our team, resulting in a lot of back and forth between counsel, auditors and the portfolio companies to make sure everything's up to speed. That's a long process if we're really on top of it, and it takes up a lot of bandwidth from the front office and back office team to get that in place. What we've implemented through Aumni’s investment analytics platform has all that in one place from up-to-date documentation, ownership, share counts, et cetera. Now we just share that data with the auditors for them to be able to jump in and use themselves.”

The biggest pain points firm managers voice about the audit  

The ability for a firm to provide data points and documents in a timely manner remains a constant concern with fund managers. Finance departments are tasked with balancing the daily functions for the firm in addition to the operational overhead of a fund audit. Having all the pieces come together on time becomes a stress point. The advice of our panelists is to anticipate what’s coming and prepare for the audit before year-end. This can be achieved in part by working with the fund managers to align on what will be needed from a valuation perspective.

Valuation tends to be one of the heavy lifting items for an audit, according to our panelists. When the work happens early, the audit process can happen more smoothly. If the valuation framework is in place throughout the year, this can improve the chances of a timely process. When data is tracked reliably, such as KPIs from the portfolio companies, board decks and other data points in one place, it allows firms to more easily access key projections and financials that drive evaluations as they near the fourth quarter. This data can then be easily shared.

The role of an auditor and where the industry is going

Fund auditors have seen a shift in the investment community on the valuation side. Bryan Gendron of Frank Rimerman has seen clients making a shift towards utilizing multiple service providers, from administrators to financial technology such as Aumni. Gathering and organizing data efficiently not only supports strong due diligence when they're raising new funds, it also helps them through the audit process. The assurance process is easier with proper reporting and the ability to see the actual documents coming into place from the different areas that they utilize.

Strata Fund Solutions’ Jared Broadbent shared that over the last 10+ years as venture capital has become a more prominent asset class for institutions, they're starting to see more rigor being brought to the table when it comes to operational readiness for venture capital funds. The days seem to be fading away when simply receiving a healthy return was enough. Now, the focus is on what a firm’s performance looks like on a deeper level. He says answering the call for governance and data reporting for these asset classes will come down to the people, the process (and documentation), and the technology that they have in play. Developing a robust data strategy will not only make audits go smoother but prepare firms for growth.