Beyond the Year-End Close: What Fund Managers Should Look for in an Audit Firm

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For CFOs, controllers and COOs at private fund managers, audit readiness is not simply a year-end exercise. It depends on whether valuations, financial reporting, governance and fund documentation can withstand scrutiny throughout the year and whether the audit team understands the operating realities behind them.

PKF O’Connor Davies audits private equity, venture capital, hedge fund and other alternative-investment managers across U.S. and offshore fund structures. We combine partner-led service and Big Four technical experience with practical insight of former private-markets operating executives who can support our audit teams on relevant market and technical issues. This gives emerging and middle-market managers an audit partner that can address complex requirements while remaining close to the day-to-day realities of their business.

The sections below highlight the areas where that preparation matters most.

Valuation: Support the Conclusion, Not Just the Number

Fair value measurement (ASC 820) often involves significant judgment, making it a recurring area of audit and regulatory focus. Concerns may arise from a lack of a reasonable basis for valuation assumptions, cherry-picking favorable market data, ignoring contrary evidence, weak valuation governance and internal controls or disclosures that do not adequately explain the valuation methodology, assumptions and uncertainty underlying reported fair value.

The practical challenges vary by strategy:

• Venture capital and private equity: Fund managers often rely on unobservable inputs and complex models. Common pitfalls include unsupported earnings before interest, taxes, depreciation and amortization (EBITDA) multiples, stale market comparables, inconsistent discount rates, undocumented assumptions and estimates and calculation errors. A recent financing round or transaction may offer relevant evidence, but it should be assessed based on the interest sold, e.g., the nature of the financing, the new financing’s place in the capital stack, its specific terms and conditions, timing and conditions at the measurement date — not automatically adopted as the new fair value.
  
  
• Hedge funds: For portfolios weighted toward traded instruments or complex derivatives, the focus often shifts to pricing-source reliability, stale prices, valuation adjustments, model inputs and support for fair-value hierarchy classifications.
  
  
• Funds of funds and alternative investments: Maintain an alternative-investment support matrix. Obtain the latest available audited financial statements of underlying investee funds, together with current net asset value (NAV) or capital statements, manager reports, valuation dates and subsequent event information. In addition, investigate significant differences and stale information.

Management should maintain a formal written valuation policy addressing methodology, responsibilities, required support and review expectations. A valuation committee should provide active oversight and its minutes should document more than simple approvals, including assumptions discussed, challenges raised, contrary and conflicting indicators considered and the rationale for the conclusion(s).

PKF O’Connor Davies audit teams work with investment managers to navigate the audit considerations associated with complex or illiquid investments and identify the valuation support needed for audit purposes. For Level 3 and other complex investments, the audit team utilizes our in-house valuation specialists, which highlights our value-added team approach as part of these audits.

Financial Reporting: Build Audit Readiness into the Close Process

Recurring audit observations often arise from late or incomplete reporting packages; insufficient support for disclosures; inadequate review of capital activity, investor allocations, expenses and related-party transactions; weak close controls; and limited or incomplete evidence of management review. Delayed reconciliations and delayed or incomplete supporting documentation can create unnecessary pressure and obscure material reporting issues.

Management should maintain a financial reporting close calendar with clear ownership of tasks and review deadlines. Before books are closed, management should review and approve:

• Fund activity and allocations: Verify capital activity, investor allocations, management fees, incentive allocations, fee offsets, expense allocations and verify that related-party balances are complete and reviewed.
  
  
• Reconciliations and disclosures: Verify cash, investment, administrator, custodian and counterparty reconciliations; then finalize financial statement tie-outs and disclosure support.
  
  
• Receivables and subsequent collections: Review material receivables and subsequent collections before closing the books. Investigate uncollected balances promptly to determine whether they remain recoverable and whether an allowance, impairment, write-off or other adjustment is appropriate.
  
  
• Strategy-specific activity: Venture capital managers may focus on financing events and impairment indicators. Private equity managers may focus on portfolio-company reporting, acquisitions, dispositions, continuation vehicles and carried interest. Hedge fund managers may focus on pricing exceptions, derivatives, counterparty reconciliations and liquidity terms.
  
  
• ASC 946 presentation, where applicable: Confirm that the schedule of investments is complete and appropriately presented and that financial highlights are calculated correctly for the fund structure and investor classes. This may include expense and net investment income ratios, total return or since-inception internal rate of return (IRR) and per-LP unit information. Also assess whether a statement of cash flows is required or whether an applicable exemption is available.

Our audit approach looks beyond whether reporting schedules are complete. We focus on the transactions, fund terms and judgments underlying those schedules — particularly where complex allocations, new structures, administrator changes or unusual activity may affect financial reporting and disclosures.

For investment managers experiencing rapid growth or structural change, early coordination with your PKF O’Connor Davies audit team can help clarify reporting considerations, documentation needs and information requirements as the reporting process scales. Our fund administration practice experience allows us to leverage the financial reporting knowledge from that service line.

Governance and Compliance Documentation: Bridge Policy and Practice

A written policy does not, by itself, demonstrate that a process is operated as intended. Investment managers should be able to show that significant procedures were performed, reviewed and followed up during the year.

An independent financial statement audit does not provide assurance that an advisor complies with all applicable securities laws and regulations. However, compliance-related matters can intersect with financial reporting. Unsupported expense allocations, unapproved fee arrangements or disconnects between fund documents, marketing materials and actual practices can create both audit findings and regulatory or governance questions.

Management should confirm that it has complete and accessible documentation for:

• Compliance reviews and testing of operational workflows, where applicable.
• Approval of significant transactions, fee offsets and expense allocations.
• Valuation committee and governance meeting materials and minutes.
• Policy updates reflect new products, systems, service providers or regulatory developments.
• Follow-up on identified exceptions, remediation efforts and outstanding matters.

Further, an SEC-registered advisor relying on the annual audit provision for a pooled investment vehicle must distribute audited Generally Accepted Accounting Principles (GAAP) financial statements to investors within 120 days of fiscal year-end or within 180 days of fiscal year-end for a fund of funds. Early coordination among management, the administrator and the audit team is therefore essential.

The SEC Division of Examinations FY 2026 priorities identify private funds, valuation, fees, disclosures and compliance programs as areas that may receive attention in investment-advisor examinations. See our article Understanding the SEC’s 2026 Examination Priorities. Although a financial statement audit is distinct from an SEC examination, weak documentation and governance can delay audits, increase costs, require financial statement adjustments and prompt investor or regulatory questions. Not every audit observation is a regulatory violation; the appropriate response depends on the facts and applicable requirements. The best practice should also be to review the SEC examination priorities annually.

PKF O’Connor Davies leverages our Partners who have experience working for regulators as well as our Partners who have come from large financial institutions, whose knowledge and experience in governance and compliance are leveraged by the audit team to provide the most value to our clients.

Key Actions before Audit Fieldwork

Management can improve audit readiness by:

• Conducting a post-audit debrief: Meet with finance, operations, legal/compliance and the fund administrator to assess prior-year audit challenges, management letter observations and comments and recurring documentation gaps. Assign owners and target dates for agreed-upon improvements so they are embedded in the next close cycle rather than revisited at the following year-end.
  
  
• Performing periodic cross-functional reviews: Confirm that changes in fund strategy are reflected in accounting records, investment policy, valuation policy and investor disclosures.
  
  
• Enhancing valuation documentation: Maintain support for significant conclusions, including market data, approved forecasts, key assumptions, contrary evidence and supervisory review. Use calibration and back-testing, where relevant, to compare historical valuations with actual exits, financing rounds or transaction data. Periodically, review your fund’s valuation policy and make updates and modifications as applicable.
  
  
• Resolving or formally tracking open items: Maintain a schedule of open and unreconciled items. Address outstanding reconciliations, exceptions and complex accounting questions before audit fieldwork begins.

Strong preparation enables management and the audit team to focus on significant judgments rather than reconstructing decisions after the fact. PKF O’Connor Davies continues to help our clients prepare for these actions. Through active partner involvement, early communication and long-term client relationships, our audit teams help investment managers identify the information needs and significant matters that warrant attention before fieldwork begins.

Looking ahead, investment managers should focus not only on completing the audit on time, but also on maintaining reporting and governance processes that provide timely visibility into significant judgments, exceptions and emerging risks. This discipline helps management make more informed decisions throughout the year and enter audit fieldwork prepared to support its conclusions.

Whether you are preparing for your next audit cycle or considering a change in audit firm, PKF O’Connor Davies brings deep alternatives experience, partner-led service and practical industry insight to the audit of private fund managers. Contact our Financial Services Audit team to discuss your audit requirements.

Contact Us

We welcome the opportunity to answer any questions you may have related to this topic or any other audit, accounting, tax or advisory matters. Please contact your client service team or:

Michael A. Provini, CPA
Partner
mprovini@pkfod.com | 646.449.6330

Jaini Shah
Manager
jshah@pkfod.com | 914.421.5684

Eric Gelb, CPA
Partner
egelb@pkfod.com | 914.341.7049