Just How Common is Changing Auditors for Private Funds?
4/10/2024
The first quarter of the year is a busy one for Registered Investment Advisers: those with a financial year end of December 31st are required to file an updated Form ADV within 90 days, so for those watching the private fund industry, there is plenty of information that can be gleaned from looking at this data.
Plenty of firms look at the data to see which firms and their affiliated private funds have changed service providers. Of course, private funds and their advisers changing service providers is nothing new. A range of factors drive the decision; costs, quality of the offering and the customer service function, to name a few.
But one service provider change raises more eyebrows than any other: Auditors.
Reasons that a private fund might change auditors include those listed above. But a change of auditor may suggest potential accounting issues or a breakdown in trust between the fund and the previous auditor. Neither of those reasons receive a green check mark on a due diligence questionnaire and almost always call for a deeper dive by the investor (and can even be a cause for redemptions for those that are at the ‘very averse’ end of the risk spectrum).
So, it perhaps comes as a surprise that, according to data collected by 9AT by aggregating Form ADV filings in the US, 2,346 private funds changed audit firm in the year to March 31st, 2024.
That seems like a high number on the surface. But looking at that in percentage terms, there were 75,468 funds outstanding at the start of the period, so at a macro level, only 3.1% changed auditors.
The SEC splits funds into sub-categories and the manager selects what they think is the most appropriate label for their fund when they file. Figure 1 below shows the breakdown of the number and percentage of funds that changed auditor in the period April 1, 2023 – March 31, 2024, based on the SEC filing category.
Figure 1: Private Funds that changed auditor, April 1, 2023 – March 31, 2024
Fund Type | Number of Funds Changed | Total Number | % |
Private Equity | 874 | 13,745 | 6.4 |
Venture Capital | 543 | 15,505 | 3.5 |
Hedge Fund | 458 | 29,705 | 1.5 |
‘Other’ | 269 | 7,750 | 3.5 |
Real Estate | 172 | 5,770 | 0.3 |
Securitized Asset | 28 | 2,895 | 1.0 |
Liquidity | 2 | 98 | 2.0 |
Source: 9AT
Whether the percentage figures above are high, low, or in the middle is a question for the individual, given its subjectivity.
It is perhaps little surprise which audit firms comprise the top five of the ‘competitor displacement’ table. Figure 2 below shows the top five firms, sorted by most to least, that have replaced a previous auditor. So, Deloitte has replaced the previous auditor most often overall; RSM has replaced the auditor most often in the private equity category, PwC in the real estate category, and so on.
Figure 2: Private Funds that changed auditor, April 1, 2023 – March 31, 2024, Ranked by Auditor and Category
Rank | Overall | Private Equity | Venture Capital | Hedge Fund | Other | Real Estate | Securitized Asset* |
1 | Deloitte | RSM | Frank, Rimerman & Co | Deloitte | Deloitte | PwC | Deloitte |
2 | KPMG | Grant Thornton | KPMG | KPMG | PwC | Grant Thornton | KPMG |
3 | PwC | PwC | Moss Adams | Richey May | Baker Tilly | EY | EY |
4 | RSM | KPMG | Deloitte | PwC | RSM | Citrin Cooperman | Weaver |
5 | EY | Deloitte | BDO | EY | Wolf & Co | RSM | Citrin Cooperman |
Source: 9AT
Note: The Liquidity Funds category only had two auditor changes in its entirety the time period analyzed so was excluded from the table and analysis
* The Securitized Asset category saw only five audit firms complete a competitor displacement in the time period analyzed
Interestingly, we see non-Big Four audit firms take up a significant number of spots (14) in the top five across the six fund categories. Indeed, in the Private Equity category, which saw the most auditor changes both from an absolute and relative perspective, the top two, RSM and Grant Thornton, are non-Big Four. In the Venture Capital category, which saw the second most changes from an absolute perspective and relative perspective, two non-Big Four names (Frank, Rimerman & Co and Moss Adams) appear in the top three.
Changing auditors isn’t for the faint of heart; transitioning to a new auditor involves a lot of coordination and document exchange. This can disrupt internal processes and be a drain on resources, especially for smaller funds, so regardless of the fund category, those that decided to take the plunge in the past 12 months clearly had what they felt were compelling reasons to do so. And when they did, there wasn’t necessarily a beeline straight to the Big Four.