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Thursday, February 8, 2018

RIA Exam - Preparing for an Audit in 2018

By Cory Roberson, Principal at FIN Compliance and FIN Lancer

Since the top of 2018, we’ve seen a increase in the number of examination requests by auditors at the California Department of Business Oversight (DBO).   We suspect this is due to a recent budget increase as shown in an article from Think Advisor.   

DBO spokesperson Tom Dressler explains, “The current 2016-17 budget is $27 million for the department's BD and IA oversight work. The state has been giving the office more funds, Desslar says, so it could add 36 positions over the past two fiscal years and hopefully another 15 in the upcoming two fiscal years.  

What does this mean for my firm?

In alignment with recent SEC updates, the states have added additional disclosure requirements.  For example, on the ADV Part 2A some questions were allowed to be omitted if non-applicable for advisors.  Now examiners require more clarifications in answering those questions.

We’ve compiled information from a typical examination request list sent to a few California-based advisors this year.  This information is also helpful for advisors in other state jurisdictions.

Four common audit targets include:

Firms with High-Risk profiles,
Advisors with disciplinary or regulatory actions,
Newly-Formed Advisors,
Advisors who have never been audited.

What goes on during an exam?

SEC Exam

Typically, during a limited scope exam, an SEC auditor will send a list of items to the advisor ahead of a future visit (if any).  The division will then send a discrepancy letter of items to address for clarification and/or correct for accuracy.  We will have more blogs to cover other SEC audit types in the future.   Contact me at: for an updated document request list from March 2018.  

California DBO Exam

During a routine audit, a state examiner will send a request list, interview the firm principal for an overview of business operations, and then inspect records during a visit.  The examination will take anywhere from 1- 3 days to perform, and will include a sampling of client files by the auditor.  Although uncommon, it is possible for an auditor to show up to an advisor’s office for a surprise audit.  The auditor may choose to address discrepancies during the audit or following the visit in the form of a letter to the firm.  Contact me at: for an updated document request list from the California DBO.  

A typical examination can include the following (request list items in red):

Financial Books and Records

As a part of Books and Records requirements, firms are required to generate Balance/Income sheets and General Ledger reports using a GAAP format.  This information is usually requested in accrual format.
We now understand that CA examiners will likely request financials in 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*
Verification Form*

On reports, we suggest that firms label business income to match the services listed on the ADV or the examiner may ask for additional clarification. 

*For CA firms -  Financials must be sent on either a monthly or annual basis if firm is subject to minimum financial requirements (CCR 260.237.2).  

For other states – check requirements on our software, RIA Review.

Advisory Agreements

Advisors should maintain copies of all client contracts.  If agreement is outdated or missing from client file, firms should send either a new agreement and/or addendum for clients to sign with an accurate description of all services and fees paid.

Client Lists

Examiners will review copies of all managed client account lists to sample fees and the nature of these relationships for the firms.  If deemed as having custody (e.g. Trustee for a clients’ or check writing authority), advisors should adhere to custody rule provision also listed in Custody Center of our software RIA Review.  

A list of Financial Planning clients or other client types will be requested if marked on ADV 1A (Item 5) or 2A (Item 7).

A Brokerage Account list will be required for all firms who manage client portfolio accounts.


Advisors should maintain a correspondence file of all client records and business activities.  These files can be kept on paper or, for best practices, in electronic format such as in the cloud or in a CRM tool.

Firms should maintain a client complaint file even if there are no such events.  This form of recordkeeping can be kept on paper or, for best practices, in electronic format such as in the cloud or in a CRM tool.

Advertising for firms that release marketing material:

Based on a special examination from the SEC (Touting Initiative), examiners are looking for firms to add proper disclosures that explain and/or justify the use of professional awards, advisor ranking lists, and/or professional designations in advertising materials.

Any uses of Professional Designations should include disclosures with a summary of minimum qualifications required for achieving credentials, continuing education requirements, and if the educational award is still active.

A summary of all Third-Party Accolades should include disclosures for the methodology of data, time period of awards, and limitations for relying on certain information.  In addition, firms should avoid misleading information, such as referencing awards that have lapsed or represent accolades from several years prior with such disclosures. 

Also, in accordance with advertising code C.C.R 260.235 (based on SEC Rule 206(4)-1), standard advertising disclosures are required for all marketing materials.

Other discrepancies are commonly seen on the Form ADV (Part 1A, 1B, 2A, 2B, and/or Appendix I for wrap accounts)

Common discrepancies that we’ve noticed from advisors include the following:

ADV Part 1A Item 5 (services) doesn’t match all services listed in ADV Part 2A (Item 4) and/or agreement.
ADV Part 1A Item 5 (fees) doesn’t match all fees listed in ADV Part 2A (Item 5) and/or agreement.
ADV Item 5 (personnel) doesn’t match current organization chart.
ADV Part 2B (business/employment history) doesn’t match current U-4
Missing client agreements.
Financial Statements include calculation errors.
Professional designations (e.g. CFP, CFA, etc.) and examinations (e.g. Series 7, 66, etc.) must be separately labeled.

Where to make changes?

Changes to your firm’s ADV are typically made by filing an Other Than Annual Amendment.

Compliance and Business Management

FIN Compliance ( 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:


FIN Missions ( 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.

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