Why Unit Prices Should be Audited

Should unit prices be the subject of an external audit opinion? In the present environment only annual financial statements and sometimes distributions are audited. As an investor I’m interested in two things:

• am I paying the right amount for my units, and
• is the fund manager doing what he says he promised to do in the PDS.

For most funds the focus is on the audit of financial statements as required by the Corporations Act. This audit though focuses on a point in time and gives no insight into the accuracy of unit prices over the other 364 days of the year. Financial statements include a reconciliations between the market value shown in the financial statements and the market value (or cost) used for unit pricing. Most practitioners avoid the external auditors looking at the unit prices by putting this reconciliation in the Directors’ report. My belief is that this should be included in the notes to the accounts which would then require review by the external auditors.

If there is confidence that unit prices are accurate then the industry should welcome this review of the process. If it is accepted that the audit is required then the difficulty becomes what would the extent of that audit be and are the external auditors the best people to provide this opinion.

Any audit opinion over the accuracy of unit prices would look at the RE’s compliance with IFSA standards, APRA/ASIC Guide, market practice, internal policies and procedures, etc. The opinion would cover how closely aligned the RE’s unit pricing policies are to the IFSA standards, ARPA/ASIC guide and market practice and the application of these policies. In summary the auditors would be asked to opine on whether the RE has materially maintained unitholder equity through its calculation and application of the unit price over the prior year.

 

Looking at the current structure of audit reviews there are audit opinions over: 

• Financial statements – covering compliance with accounting standards, specifically that all income and expenses have been recorded correctly and that assets are valued correctly as at 30 June
• AGS1042 Controls report – over internal controls, policies and procedures
• AFSL Licence audits
• RMP and RMS audits
• Compliance plans, Derivative Risk Statements audits
• And for investment managers owned by an overseas company there are a raft of other audits

However none of these audits specifically targets unit pricing; which is the area where there has been the largest losses and everyone agrees has the highest risk. Although I’m sure that this is music to the ears of any external auditors investors need to have adequate protections around the calculation of unit prices. When a unit pricing error occurs referring to the audited annual financial statement will not be any comfort.

 

The second test that investors are interested in is whether the fund manager is investing the funds as outlined in the PDS. The existing Compliance plan audits provide this assurance however the investor never gets to see these audit results. Including the audit opinion on the unit price and the compliance plan in the financial statements would provide investors with more confidence that they are paying the right price and that their money is being managed as promised.