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Auditor view
Insights for the investment community from
assurance professionals

Asset management

Paula Smith
paula.e.x.smith@uk.pwc.com

What are the key concerns for auditors in the

UK asset management sector this year end?
Auditing asset management companies
always presents challenges. What are
auditors likely to focus on at this year end
in particular?

Valuation

This Auditor view discusses the firms

view of the key areas of focus across the
sector and does not reflect the particular
situation of any one client or company. On
an entity specific basis, companies in the
sector may have some or all of these risks
and some companies may be subject to
risks not discussed in this document.

There continues to be evolution in

market practice in a number of areas
of valuation. In the current low rate
environment, focus on cost of funding
is causing a lengthening list of special
adjustments which need to be
considered by auditors.
Uncollateralised derivative valuation
and valuation adjustments are key
areas of focus. Auditors will challenge
managements methodology and
assumptions, consider different
collateral arrangements and test
disclosures made by management
around their derivative valuations
including adjustments.

What models are management using

to value illiquid assets? Auditors
continue to pay attention to areas of
remaining illiquidity, given the lack of
reliability of consensus pricing in these
areas. In these instances, auditors will
ask how management ensures its
valuations are reasonable.

Revenue recognition
Asset managers typically have complex fee
arrangements in place including rebates,
trail commissions, upfront commissions
and performance fees arrangements.
Auditors need to carefully consider that the
revenues recognised by Asset Managers are
in line with the underlying fee
arrangements.

Alex Bertolotti
Alex.bertolotti@uk.pwc.com

Valuation continues to be a point of focus.

For example:

Retail Distribution Review (RDR) is

effective from 1 January 2013 with the aim
to improve clarity for people who are
looking to invest, raise the professional
standards of advisers and reduce the
conflict of interest which is found in
remuneration for adviser services. The
auditor needs to consider whether the new
Asset Managers fee arrangements are in
line with the new requirements of RDR for
the purpose of regulatory reporting.

Goodwill impairment
Impairment of goodwill will be an area of
focus for auditors this year end. Among the
issues that auditors will be considering are:

Cash flow forecasts. Given the current

uncertain economic climate, how

reliable are managements estimates

when assessing future expected cash
flows? Auditors challenge
assumptions and methodologies to
gain comfort that managements
estimates are reasonable which may
give some indication of future cash
flows.

Goodwill impairment: this test is

required annually, so auditors will be
reviewing managements assumptions
about whether projections adequately
reflect future economic uncertainty.

Governance and regulations

In the recent years, the Asset Managers
have seen an increased focus on
governance and heightened fiduciary
expectations for both executives and
directors. The asset management industry
faces a highly complex and far reaching
regulatory agenda. New regulations are
forcing businesses to take a close look at
their compliance procedures, operations,
risk management systems and controls.
Laws and regulations which are central to
the entitys ability to conduct its business
are those where either compliance is a prerequisite of obtaining a licence to operate
or where non-compliance may reasonably
be expected to result in an entity ceasing
operations, or call into question an entitys
status as a going concern. The auditor
needs to consider whether the Asset
Manager has adequate controls and
procedures to ensure compliance with the
changing regulatory landscape and its
impact on the financial statements and
regulatory reporting.

Outsourced service providers

It is common for asset managers to use a
variety of outsourced service providers, for
example custodians, administrators and
transfer agents.
The primary responsibilities in relation to
the outsourced activities remain with Asset
Manager. The Asset Manager should have
appropriate controls in place over the
outsourced arrangements which may
include oversight of risk and control
function and compliance functions.
Auditors will consider the Asset Managers
processes and controls in place over the
outsourced service providers.

Share based payments

Accounting for share based payments is
complex as are the related disclosures. In
an industry where share options are often a
key part of remuneration, auditors are
likely to focus on these issues closely.

Industry metrics
The focus of this Auditor view is on the
key judgements that auditors make when
assessing managements financial
statements; but it is equally important to
highlight some of the areas of interest to
investors that are not audited, for example
assets under management which is often
used as a key metric in the sector.

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