Working with accountants and auditors

Audited financial statements are table stakes for institutional LPs. Beyond the annual audit, accountants provide structuring advice, tax support, and specialized diligence work for your transactions. Selecting the right accounting partners affects your LP access, audit efficiency, and transaction execution.

This guide covers audit requirements, how to select auditors, managing tax advisors, and working with accountants effectively on deal execution.

Audit requirements for credit funds

Fund-level audit

Your fund requires annual audited financial statements. This is required by most institutional LPs and typically required by your LPA. The administrator prepares the schedules; the auditor verifies and opines.

For credit funds, the audit involves:

Fair value testing. The auditor tests your valuations, particularly for Level 3 assets without observable market inputs. Expect sampling of loan-level valuations, review of your valuation policy, and testing of inputs and assumptions.

Portfolio verification. Confirmation that assets exist and are owned by the fund. For loans, this may involve third-party confirmations or document inspection.

Fee calculations. Testing management and incentive fee computations against LPA terms.

LP account verification. Confirming capital account balances, contributions, and distributions.

Financial statement preparation. Reviewing the administrator’s draft statements, notes, and disclosures for GAAP compliance.

SPV audits

Some rated transactions or insurance company investments require audited financial statements for the SPV issuer. This is separate from the fund audit and involves:

Auditing the SPV’s standalone financial statements
Testing the waterfall and payment calculations
Verifying collateral balances and triggers

Not all SPVs require audits. Review your transaction documents and investor requirements. If required, budget $30K-$75K annually depending on complexity.

Servicer audits

Third-party servicers typically provide USAP (Uniform Single Attestation Program for mortgage servicers) or SOC 1 (SSAE 18) reports on internal controls. These aren’t full financial statement audits but rather attestation reports on servicing controls.

SOC 1 reports cover controls relevant to user entities’ financial reporting, specifically controls over payment processing, account accuracy, and investor reporting.

USAP reports are industry-specific for mortgage servicers, covering compliance with regulations and servicing guidelines.

Review these reports as part of servicer diligence. Look for exceptions, qualified opinions, or management responses that indicate control weaknesses.

Agreed-upon procedures

For specific purposes, you may engage accountants to perform targeted testing rather than a full audit:

Loan file reviews. Sample-based testing of loan documentation against underwriting guidelines.

Covenant compliance. Independent testing that financial covenants in your credit facilities have been met.

Borrowing base verification. Testing that borrowing base calculations are accurate.

Data tape verification. Confirming that loan tape data matches underlying loan documents.

AUPs are flexible engagements where you define the procedures. They cost less than audits but provide narrower assurance.

Selecting auditors

Tier considerations

Auditing firms fall into rough tiers, each with different characteristics:

Big 4 (Deloitte, PwC, EY, KPMG)

Required by some LPs, particularly large insurance companies and certain pensions. Highest cost but broadest acceptance. For smaller funds, Big 4 firms may assign junior partners without deep alternatives experience.

Typical fund audit fees: $150K-$400K+ depending on complexity.

National firms (BDO, Grant Thornton, RSM)

Growing alternatives practices. Competitive pricing with often better service attention for mid-size funds. Increasingly accepted by institutional LPs, though some still require Big 4.

Typical fund audit fees: $100K-$250K.

Specialist alternatives firms (Eisner, Withum, Anchin)

Deep credit fund expertise. Often the best service and pricing for emerging and mid-size managers. May face acceptance issues with some institutional LPs.

Typical fund audit fees: $75K-$175K.

LP requirements

Before selecting an auditor, survey your LP base:

Do any require Big 4?
Do any have specific auditor preferences or exclusions?
What audit deadlines do they require?

If you’re raising from insurance companies, confirm auditor acceptance early. Getting through LP diligence only to discover your auditor isn’t acceptable wastes time.

Credit fund expertise

Not all auditors understand credit fund structures. You need an auditor that can handle:

Loan-level valuations. Testing fair value marks on individual loans, understanding credit adjustments and discount rates.

Waterfall calculations. Verifying subordinated position values that depend on priority of payments.

Complex fee structures. Incentive fees with hurdles, catch-ups, and clawbacks.

SPV consolidation. When to consolidate SPVs and how to account for VIE interests.

Ask specifically: “How many private credit funds do you audit? What’s your experience with [your asset class]?”

Partner quality

You want a partner who invests time in understanding your business and will be available during crunch periods. For Big 4 firms at smaller funds, you may get a junior partner without relevant experience.

Evaluate:

Partner’s specific credit fund experience
Team continuity (will the same partner and manager handle your fund for multiple years?)
Partner availability and responsiveness
Team bandwidth during audit season

Timeline capability

Credit fund audits often have tight deadlines driven by LP reporting requirements. If you need draft financials by March 15 for LP distribution, confirm the auditor can deliver.

Audit season is competitive. Large firms may deprioritize smaller clients. Understand:

When will fieldwork occur?
When will draft financials be ready?
What’s the backup plan if issues arise?

Audit fee expectations

Fund-level audit

Fund Size/Complexity	Big 4	National	Specialist
Simple (<$300M, single vehicle)	$175K-$275K	$100K-$175K	$75K-$125K
Moderate ($300M-$750M, feeders)	$225K-$350K	$150K-$225K	$100K-$175K
Complex (>$750M, multiple vehicles, credit facilities)	$300K-$500K+	$200K-$350K	$150K-$250K

Complexity drivers:

Number of vehicles (each feeder adds scope)
Asset class (loans requiring individual valuation vs. traded securities)
Level of credit facility testing
Timing pressure (accelerated deadlines cost more)

Other accounting work

Service	Typical Range
SPV audit	$30K-$75K per SPV
Agreed-upon procedures (loan file review)	$25K-$75K depending on sample
Tax return preparation (fund)	$25K-$75K
K-1 preparation	$200-$500 per K-1
Comfort letters (for term deals)	$25K-$100K

Fee negotiation

Audit fees are negotiable, particularly for multi-year commitments:

Competitive bidding. Get quotes from 2-3 firms. Even if you prefer one firm, competition produces better pricing.

Multi-fund commitment. Committing to use the same auditor for subsequent funds provides leverage.

Fee caps. Agree to maximum fee increases per year (3-5% is reasonable).

Scope clarity. Define what’s included and what triggers additional fees. Ambiguity leads to billing surprises.

Tax advisors

Structuring advice

Get tax advice before launching a fund, not after. Key decisions include:

Fund structure. Domestic vs. offshore, Delaware LP vs. LLC, blockers for tax-exempt investors.

Feeder arrangements. Parallel funds, master-feeder, whether to have separate offshore vehicles.

Transaction structures. How to structure SPVs, treatment of income (ordinary vs. capital), and state tax considerations.

Carried interest. Holding period requirements, character of income, and documentation.

Your tax advisor may be the same firm as your auditor (convenient, potential conflicts) or a different firm (more independent perspective, more coordination). Many funds use the same firm for both with appropriate walls.

Compliance

Ongoing tax work includes:

Fund tax returns. Annual federal and state filings for the fund and any related entities.

K-1 preparation. Calculating each LP’s share of income, deductions, and credits. For funds with complex waterfalls or varying LP economics, this is intricate work.

State filings. Depending on where you operate and invest, you may have filing requirements in multiple states.

International reporting. FBAR, FATCA, CRS, and other international information reporting.

Investor tax support

Your LPs will have tax questions:

How is income characterized?
What’s the UBTI exposure for tax-exempt LPs?
How are foreign investors treated?
When should LPs expect K-1s?

Your tax advisor supports these inquiries and helps prepare investor-facing tax information.

Selecting a tax advisor

Specialization matters. Private fund taxation is specialized. General corporate tax experience doesn’t translate.

LP base considerations. If you have significant non-U.S. or tax-exempt investors, you need advisors experienced with those investor types.

Same firm or different? Using the same firm for audit and tax simplifies coordination. Using different firms provides independent perspectives but requires more management.

Accountants in transaction execution

Comfort letters

For rated term securitizations, underwriters and rating agencies require comfort letters from accountants. The comfort letter provides:

Negative assurance. The accountant states they’re not aware of any material misstatements in the financial data included in offering documents.

Agreed-upon procedures. Specific testing of data tables, statistical information, and other numerical content.

Comfort letters require accountant involvement during document drafting. Budget 4-6 weeks for the process and $25K-$100K+ in fees depending on deal complexity.

Due diligence support

When acquiring portfolios or evaluating originators, accountants provide:

Financial due diligence. Analyzing historical financial statements, quality of earnings, and normalized performance.

Operational due diligence. Evaluating servicing operations, controls, and infrastructure.

Data verification. Testing that portfolio data matches underlying documentation.

Transaction structuring

For complex transactions, accountants advise on:

Consolidation. Whether SPVs should be consolidated or treated as off-balance sheet.

True sale. Accounting treatment of asset transfers and whether transactions qualify as sales.

Hedge accounting. Whether hedging relationships qualify for favorable accounting treatment.

Get this advice early in transaction planning, not after documents are drafted.

Working with accountants effectively

Engage early on new structures

Before launching a new fund or transaction structure, get accounting and tax advice. Fixing structure problems after launch is expensive and sometimes impossible.

Key questions to address upfront:

How will the fund structure affect LP tax treatment?
What are the consolidation implications of our SPV structures?
How should we account for complex or unusual assets?
What are the K-1 timing implications of our waterfall?

Define scope clearly

Audit scope, out-of-scope items, and additional fees should be documented before engagement. Ambiguity leads to disputes.

Specifically define:

Which entities are included
What testing is expected for Level 3 valuations
What’s required for any credit facility covenants
Timeline for deliverables

Set realistic timelines

Year-end is busy for everyone. Communicate your deadlines early and confirm the auditor can meet them.

Build in buffer:

If LPs need financials by March 31, target March 15 for draft completion
If K-1s must be out by March 15, start preparation in January
If you’re doing a rated deal in Q2, engage comfort letter discussions in Q1

Keep records organized

The quality of your internal record-keeping directly affects audit efficiency and cost. Clean books mean lower fees.

Valuation support. For each Level 3 asset, maintain documentation supporting your valuation (pricing services, comparable transactions, DCF inputs).

Transaction documentation. Keep loan documents, modifications, and correspondence organized and accessible.

LP records. Maintain complete capital account records with support for each contribution and distribution.

Communicate during the engagement

Don’t wait until the end to surface issues. Regular check-ins catch problems early:

Weekly status calls during fieldwork. Understand what the auditor is finding, address questions promptly.

Early identification of issues. If the auditor has concerns about a valuation or accounting treatment, discuss early rather than discovering it in the final opinion.

Manage surprises. If something unusual happened during the year (a significant write-down, a fund-level covenant breach, LP litigation), tell the auditor before they discover it.

Common issues

Valuation disputes

The problem: The auditor challenges your marks on illiquid loans.

Why it happens: Fair value accounting for Level 3 assets involves judgment. Auditors are required to challenge assumptions.

How to manage:

Document valuation methodology and inputs thoroughly
Use third-party pricing services where available
Maintain consistency in approach period-to-period
Discuss significant marks with the auditor before year-end, not during fieldwork

Timeline pressure

The problem: The audit takes longer than expected, threatening LP reporting deadlines.

Why it happens: Audit season is busy. Issues that arise during fieldwork extend timelines.

How to manage:

Start audit planning in Q4, not January
Provide complete schedules and support at fieldwork start
Respond to auditor questions same-day
Have a backup plan for LP communication if delays occur

Fee overruns

The problem: The final audit bill significantly exceeds the original quote.

Why it happens: Scope creep, unexpected complexity, or issues discovered during fieldwork.

How to manage:

Get detailed scope documentation upfront
Negotiate fee caps
Monitor hours during the engagement
Discuss variances before they become large

K-1 delays

The problem: K-1s are delivered late, frustrating LPs.

Why it happens: Tax preparation depends on audit completion. Complex waterfalls take time.

How to manage:

Sequence work so tax preparation can begin as audit nears completion
Provide estimated K-1s if final versions will be late
Communicate timeline expectations to LPs in advance

Auditor selection checklist

Initial evaluation

Survey LP base for auditor requirements
Identify 2-4 auditors with credit fund experience
Request proposals with fee estimates
Meet potential audit partners (not just the sales team)
Evaluate credit-specific expertise
Check references with comparable funds

Due diligence

Confirm partner and team assignments
Understand timeline capabilities for your deadlines
Review their Level 3 valuation testing approach
Assess technology and data request processes
Understand their approach to first-year audits

Contract negotiation

Negotiate fee ranges for defined scope
Establish fee caps or maximum increases
Clarify what triggers additional fees
Set timeline expectations in writing
Confirm multi-year partner continuity

Ongoing relationship

Establish primary contacts on both sides
Schedule audit planning meeting in Q4
Provide complete schedules at fieldwork start
Conduct weekly check-ins during fieldwork
Debrief after each audit to improve next year