Fund Audits and Annual Reporting Requirements
Private funds owe investors financial statements and tax reporting, usually set out in the governing agreement, with Schedule K-1s for partnership investors. A registered adviser to a pooled fund can satisfy the SEC custody rule by delivering audited financial statements within the required period, and many agreements require an annual audit. Exempt reporting advisers update Form ADV annually, and large advisers may file Form PF. The specific obligations depend on the fund's terms and manager's status.
What investors usually receive
- Annual financial statements. Often prepared under accounting standards and sometimes audited.
- Quarterly or periodic reports. Performance, valuations and portfolio updates.
- Tax documents. A Schedule K-1 for each investor in a partnership-taxed fund, after the fund files its partnership return.
- Capital account statements. Contributions, distributions and ending balance.
The governing agreement should state what is delivered and when.
The audit question
| Situation | Audit |
|---|---|
| Governing agreement requires it | The fund must obtain an audit as promised |
| Registered adviser using the audit approach to the custody rule | Audit by an independent accountant registered with the PCAOB, delivered to investors within the rule's period |
| Exempt reporting adviser or small fund | May not be required by regulation, but investors often ask |
Audits cost time and money, so decide in the formation documents whether to promise one. An unaudited fund should say so clearly.
Adviser filings
An exempt reporting adviser files updates to its Form ADV annually and promptly after certain changes. A registered adviser files an annual amendment and delivers a brochure to clients. Large private fund advisers file Form PF, and thresholds apply. See exempt reporting adviser vs registered adviser.
Tax filings
A fund taxed as a partnership files an annual partnership return and issues K-1s to investors. Delays are common, so many agreements allow extensions and tell investors to expect their K-1 later than a W-2. Texas franchise tax reports may also be due. Work with a CPA who knows funds.
Build the calendar early
- List each report, deadline and responsible person.
- Match what the PPM and agreement promise with what the fund can deliver.
- Choose an administrator or accountant early if the fund will have outside investors.
See key terms of the governing agreement for reporting clauses.
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Book Free ConsultationFrequently asked questions
Does every private fund need an audit?
Not by law in every case, but many agreements promise one, and registered advisers often use the audit method for custody compliance.
What is a K-1?
A tax form that tells each partner their share of the fund's income, deductions and credits for the year.
Why do K-1s come late?
The fund's return depends on information from underlying investments, which often arrives late. Many agreements allow extensions.
Who prepares the financial statements?
The sponsor, a fund administrator or an accounting firm, depending on the fund's size and terms.