Changes to Accounting Rules Provide Alternatives to Costly Performance Record Verifications
Anchin Real Estate UpdateFebruary 3, 2021
Aspiring investment managers looking to raise capital often find a lack of a documented track record of past performance to be a roadblock. However, with recent changes to accounting rules, investment managers may have caught a break. The Statement on Standards for Attestation Engagements No. 19 - Agreed-Upon Procedures Engagements (“AUP” or “SSAE 19”), issued in December 2019 may provide alternatives to performance record verifications that have previously been accomplished through costly examinations or Global Investment Performance Standards (GIPS) verifications.
In an AUP, the accountant performs specific procedures on a subject matter and reports their findings, without giving an opinion or conclusion on the sufficiency or appropriateness of the procedures. The findings are factual, and without any bias. Examples of when AUPs may be appropriate include: performance record verifications for emerging investment managers, reporting on construction costs of a project for the industrial and commercial abatement program (ICAP) or other similar programs, conducting due diligence for the purchase or sale of a business, and review of internal controls, including many others.
A typical AUP report is presented by listing the agreed-upon procedures to be performed and then the related findings of the accountant. Based on previous accounting standards, the procedures were required to be agreed upon in advance by the engaging party. Under the revised accounting standards of SSAE 19, the engaging party and the accountant can now jointly develop procedures, which can be modified throughout the engagement to meet the intended objectives. The accounting rules do not remove the engaging party’s responsibility to agree to the procedures and acknowledge the appropriateness and sufficiency of such procedures.
The most significant change under the new accounting standards, however, is that the accountant is now able to issue a non-restricted general-use report, although a restricted use report is not prohibited. Historically, investment managers could not use issued AUPs for marketing purposes, since the report would be restricted for the use of the specified intended parties that accepted the responsibility for the sufficiency of procedures. This included all potential users (current and future potential investors), and obtaining their agreement on the procedures was difficult and not practical. SSAE 19 no longer requires the intended users to take responsibility for the sufficiency of the procedures; instead, the engaging party (the manager) acknowledges the appropriateness of the procedures for the intended purpose of the engagement before the accountant issues the report (done in a representation letter). As there is no longer the requirement to accept responsibility by the intended users (potential investors) a general-use report can now be issued, and available to anyone deemed appropriate by the manager.
With accountants now having an opportunity to better assist their clients with agreed-upon procedures, as well as the removal of restrictions around the use of the report, this type of attestation engagement may become more widely used.