
The reliability and transparency of financial statements form the backbone of investment funds and fund managers’ operations. Auditors play a pivotal role in ensuring this by verifying compliance with regulatory requirements and fostering investor trust. However, independence is a non-negotiable requirement for auditors to remain free from any influence that could compromise the integrity of their reports.
To uphold this independence, legislation—such as Act XVI of 2014 (Kbftv.)—sets out strict provisions. These rules not only protect the integrity of auditors but also safeguard the interests of investment funds and their managers.
The Purpose of Auditor Restrictions
Regulations impose several limitations to ensure auditors’ independence:
- For individual auditors: A single auditor may oversee no more than 20 investment funds. This cap ensures sufficient attention is given to each fund, preventing overextension and mitigating dependency risks.
- Revenue thresholds: Revenue derived from auditing a single fund manager and its managed funds must not exceed:
- 30% of annual revenue for individual auditors.
- 10% of annual revenue for audit firms.
These measures are designed to eliminate financial dependencies and ensure auditors can operate independently and impartially.
What Undermines Independence?
Auditors are expected not only to act independently but also to be perceived as independent by external parties. Breaching the revenue thresholds mentioned above may lead to doubts about their impartiality, even if all other independence criteria are satisfied.
When independence is compromised, several risks arise:
- Erosion of audit credibility: This can result in a loss of confidence among investors.
- Regulatory scrutiny: Oversight authorities, such as the central bank (MNB), may launch investigations if auditors fail to act with due diligence.
- Financial losses for investors: Misleading reports could lead to flawed investment decisions, causing significant losses.
The Importance of Auditor Selection
Fund managers operate under a stringent regulatory framework designed to guarantee transparency and legal compliance. Choosing the right auditor is not just a regulatory responsibility but a strategic priority. Fund managers must ensure that:
- The auditor meets all independence requirements.
- Auditor fees are proportionate and do not pose a risk to impartiality.
How Skilled Auditors Add Value
Engaging an experienced auditor can deliver significant benefits, such as:
- Timely and accurate reporting: Reports that comply with regulatory standards and align with investor expectations.
- Accurate Net Asset Value (NAV) calculation: Ensuring precise NAV calculations is critical to avoid costly errors and maintain investor confidence.
Conclusion
Auditor independence is a cornerstone of the integrity and stability of investment funds. Regulatory safeguards are in place to preserve the objectivity and quality of audit work, which is essential for the broader financial ecosystem. By adhering to these standards, auditors and fund managers can ensure long-term, stable, and trustworthy operations.