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News September 4, 2006 Issue

Accounting Firms Obtain Hedge Fund Audit Relief

A group of accounting firms has obtained no-action relief allowing them to serve as independent auditors under the SECís custody rule, even though they do not meet the test for "independence" under the SECís auditor rules.

In a joint letter to the staff, Deloitte & Touche, Ernst & Young, KPMG, PricewaterhouseCoopers, and other accounting firms explained that they have historically determined independence for purposes of conducting audits of hedge funds managed by unregistered advisers by applying the AICPAís independence standards, which are not as broad as the SECís independence standards. As a result, after registering with the SEC, many newly-registered hedge fund managers found themselves in a situation where they were precluded from using certain accounting firms as independent auditors under the custody rule, because the manager previously had retained the firm to provide ongoing work that would disqualify the firm under the SECís auditor independence rules.

The staffís relief allows managers to treat otherwise disqualified accountants as independent for purposes of the custody rule. However, the disqualifying non-audit services or other relationships must end no later than June 30, 2007.