Advisors – Six ways to reduce possible audit discrepancies

By Cory Roberson, Principal at FIN Compliance and FIN Lancer

It can feel like a punch in the stomach when a regulator hands you a discrepancy (fix-it) letter on top of your overwhelming list of obligations.  Discrepancies are a common occurrence for advisors registered with the SEC, FINRA, and state securities regulators.  Last September state securities regulators issued their examination findings of more than 1000 firms (see “NASAA Examinations report”).  We want to take some time to discuss our own recent audit observations in hopes of preparing for firm for the next audit. 

   

Over the last few months, we’ve noticed that many audit discrepancies arise when firms do not report all operational/firm changes uniformly across all required forms (e.g. ADV, U-4, and Agreements).  For other advisors, many issues come from mislabeling items on the ADV, agreements, and/or with missing documentation.  We’ve also noticed that some firms got dinged for inaccurate financials or other related reporting.   

We find that regulators change their review over time.  Don’t be alarmed - it can take a work of magic to update all firm paperwork on a regulator basis. We believe that advisors can better arm themselves for reducing discrepancies by developing a system to review and  update all materials.  

Below are six steps for achieving this:

1. Conduct internal reviews to look for operational changes.

Firms would be better prepared by conducting an internal review on a quarterly basis.  (e.g. setting an agenda with a compliance meeting and updating paperwork).  A prep system is available on our software:  RIA Review.   Changes should be applied across all reporting forms (see example in #4)

2. Review client files when necessary.

Client files pose a higher risk for discrepancies with the presence of outdated client paperwork, agreements, and suitability documentation.  When there are changes to firm services or client information, firm and client paperwork must also be changed.  For larger firms, it may be difficult to achieve this when there are hundreds of files.  As such, we recommend doing this in stages.  

Some jurisdictions require suitability documentation to be updated at least every three years.

3. Understand ADV changes when filing the annual amendment.

SEC released changes to Part 1A, 2A/B in October 2017.

Part 1A – https://www.sec.gov/about/forms/formadv-instructions.pdf

Part 2A – https://www.sec.gov/about/forms/formadv-part2.pdf

Firms that did not review recent ADV changes are likely to have discrepancies. 

4. Understand where to file when there are updates in firm operations.

ADV Part 1A v. 2A v. agreement changes (services, fees, operations)

ADV Part 1A v. 2A/B* v. U-4 changes (personnel information)

When filing the ADV, we suggest that you have another person/employee confirm filing for accuracy and/or to address newer regulatory changes. Audit changes to your firm’s ADV are typically made by filing an Other Than Annual Amendment.

5. Review SEC risk alerts for updated guidelines.

Example:   SEC Advertising Risk Alert – September 2017

https://www.sec.gov/ocie/Article/risk-alert-advertising.pdf

Based on the SEC ‘Touting Initiative’, many examiners are looking for firms to add proper disclosures that explain and justify the use of professional awards, advisor ranking lists, and professional designations in advertising materials.

6. Review financial reporting preferences for each state jurisdiction

(not required for SEC firms).

As a part of Books and Records requirements, California firms are required to generate Balance/Income sheets and a General Ledger listed in either cash or accrual formats. 

Examiners will likely request financials using an accrual format to review business income, debt, and expenses on the following supplemental documentation: monthly bank statements, monthly credit card statements, monthly brokerage statements, minimum financial worksheet, and verification form.

We suggest that firms make sure business income listed on financial reports matches the services listed on the ADV or the examiner may ask for additional clarification.  Also, advisors should separate business and personal activities on their financials.  Even using a personal credit card with the business corporation (C-Corp, S-Corp, LLC, etc.) is frowned upon.  

Summary: 

Firms should remain aware of their reporting obligations when there are changes to operations and regulatory requirements. We believe that taking the steps above will help to reduce the number of audit discrepancies for your firm. 

Email Us to schedule a brief session to review needs

Compliance and Business Management

FIN Compliance (FINCompliance.io) is a consortium of compliance services including: RIA Consults-Roberson Consults Group, a compliance consulting firm, RIA Review, a compliance-management software tool (SaaS), B-D Review, a RIA/Broker-Dealer compliance management software tool, and FINLancer is a business management portal featuring:  E-signature tools; Invoicing integration, Vendor Directory, continuity directory*, business client document portal, and more (available by Q3 2019).  Access all services on one site: FINCompliance.io.

Impact

FIN Missions (FINmissions.com) provides business support group sessions for other entrepreneurs.  In addition, Cory has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.