Fund audits: Turning compliance into an operational advantage

Almost all private equity (PE) firms—including many venture capital (VC) firms—conduct annual audits of their funds. As a fund manager or GP, knowing what auditors are looking for—the process, timeline, and documents needed—can help set your fund up for success.

What is a fund audit?

A fund audit is an independent examination of a fund's financial statements conducted by a third-party auditor for compliance with the applicable accounting framework (i.e., US GAAP or IFRS). The primary purpose of an audit is to verify that the fund’s general partners (GP) are operating in compliance with the rules established during fund formation in the limited partnership agreement (LPA). This agreement is the legal document that governs the relationship between the fund managers and the investors.

The audit also provides the fund’s investors, known as limited partners (LP), with an objective opinion on the material correctness of the fund’s financial statements and portfolio valuation. It serves as an important check to ensure that the financial information you provide to your investors is fair and accurate, fulfilling the auditor’s duty to protect investors through independent reports.

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Venture capital fund audits

For a VC fund, investors might include friends and family, or more sophisticated investors (for example, pension funds, investment groups, trusts, government entities, or other external parties). Auditors perform audit procedures over the annual financial statements, which include the fund’s ownership and valuation of its portfolio companies (portco), net investment income, and allocations to investors.

Key audit procedures include:

• Verification of the existence and ownership of investments: Confirming that portcos are still active entities and determining the specific financial instruments (e.g., shares, convertible notes) held by the fund

• Evaluation of portco valuations: Assessing the fair value of the fund's investments in portcos

• Accuracy of management fees and carried interest calculations: Reviewing the calculations for management fees and carried interest attributed to the fund manager

• Allocation of profits and losses to investors: Checking the accuracy of allocations made to limited partners

The most challenging part of a VC fund audit is portco valuations. VC portcos are typically fast-growing, early-stage startups that may not yet be profitable or even generating revenue. Some GPs lack full information rights for their portcos (because it is private information to the company), which can be a challenge for the GP to determine the fair value of their investment. This, in turn, creates a challenge for auditors when assessing the reasonableness of the fund’s estimation of the fair value of its investment.

LPs evaluate fund managers on the strength of their returns—but VC funds don’t typically generate returns until one or more of their portcos is acquired or goes public. In the absence of such transactions, the VC fund instead reports the estimated value of their fund assets to the LPs. An audit assures your fund's investors that an independent, third-party accounting firm has conducted a financial statement audit in accordance with the fund's operating agreement and accounting framework.

Private equity fund audits

A PE fund audit covers all the same purposes as a VC fund audit does: It provides reasonable assurance to the investors on the financial information presented in the audited financial statements. Auditors apply the same procedures across PE and VC, allocating more time to each fund type's most complex areas (distributions for VC; debt/equity transactions for PE). A PE firm’s portcos are more likely to be closer to having established operations, cash flow, and revenue, so the audit will focus on more complex distribution waterfalls and models, in addition to the valuation of the portco.

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When are audits necessary?

For most funds, an annual audit is not an optional exercise. Funds typically conduct audits either because it’s required by law or because at least one LP requires it as a condition of their investment, serving as a critical check on your fund's operations and financial health. Think of it as a yearly health checkup for your fund that provides assurance to everyone involved.

Audits required by law

The U.S. Securities and Exchange Commission (SEC) is a government agency that regulates the capital markets, including the private funds sector. U.S. securities law requires people or firms that manage money for other people to register as investment advisers. However, the SEC’s definition of VC funds exempts certain types of investment advisers (known as Exempt Reporting Advisers) from registering, although they still need to report certain information to the SEC on a regular basis. The available exemptions include the private fund adviser exemption (advising private funds only, up to $150 million AUM) and the venture capital fund adviser exemption (advising VC funds only, based on the SEC’s definition of VC funds, with no AUM limit). Versions of these SEC exemptions may also be available at the state regulator level. ERAs can skip some regulatory procedures required of registered investment advisers, including audits.

For firms not relying on an ERA exemption, RIAs typically register at the state level instead of with the SEC under $100 million in assets under management (AUM). Once an investment firm has between $100 million and $110 million in AUM it may elect to register with the SEC or the state regulator. Over $110 million, an RIA must register with the SEC, unless an exemption applies.

Once a firm must register as an investment adviser, it must begin conducting regular audits. The SEC also requires that any fund advised by a registered investment adviser (RIA) undergoes an annual audit. In states that have adopted the North American Security Administrators Association (NASAA) model rules for investment adviser regulation, private fund adviser ERAs are also required to conduct audits. This means an annual audit is actually required by law (as opposed to solely serving the investors). Your firm’s legal counsel can help you determine whether your firm is exempt from registering with the SEC as an investment adviser, as well as what your audit and other regulatory requirements may be.

Even if your fund is not registered with the SEC, state-level securities laws, often called blue sky laws, can also trigger an audit requirement. Determining your specific legal obligations requires consultation with legal counsel to ensure you remain in full compliance with all applicable regulations.

Funds that receive capital from government bodies face an additional layer of mandatory audit requirements. If your fund is licensed as a Small Business Investment Company (SBIC) under the Small Business Administration (SBA), or as a Specialized Small Business Investment Company (SSBIC), federal regulations require annual audited financial statements. If your fund has received government funding through one of these programs, consult your legal counsel to understand the specific audit obligations that apply.

Audits required by investors

Beyond any legal mandates, the most common reason for a fund audit is the investors themselves. Many LPs—institutional investors that manage money on behalf of organizations and groups like foundations, public pensions, and health care systems—often require an annual audit as a condition of their investment for two reasons:

1. Risk assessment and mitigation: Institutional investors are typically pretty conservative. Audits can bring greater transparency when investing in riskier asset classes.

2. Reputation preservation: Institutional LPs answer to their own boards and management committees and need to monitor how GPs are executing on the investment strategy that the LPs signed up for when they invested. Regular, required audits are a way for LPs to take a step toward satisfying their fiduciary responsibility to the groups whose money they manage.

For these sophisticated investors, the audit is a critical tool for conducting their own due diligence and ensuring that you, the GP, are acting as a responsible fiduciary of their capital. A consistent history of clean, timely audits is essential for building trust and is often a prerequisite for fundraising institutional capital for your future funds.

Audits required by lenders

Some banking institutions providing credit facilities to funds require an annual audit as a loan condition (this is more common for PE than it is for VC).

Do you need an audit?

Private funds can be subject to annual audit requirements, which could be imposed due to regulatory requirements or fund governance agreements. Your own audit needs will ultimately depend on investor preference and regulatory requirements. For U.S.-based private fund advisers that are RIAs, annual audits are required by the SEC. Private fund advisers must register as RIAs if they have over $150 million AUM, unless they can rely on the VC fund adviser exemption.

Can VC funds skip audits?

First-time VC fund managers may decide to forgo the expense of an audit for their fund when they aren’t required by law or an institutional LP to conduct one. Funds in their earliest stages, such as those in their first or second year of investment, that do not have a regulatory audit requirement may also skip the process, so long as none of their LPs have required one. Even if a private fund adviser is exempt at the state level, a fund audit may still be required, as not all exempt funds can forgo audits.

However, annual audits are increasingly common across the VC ecosystem. Even when they’re not required to have an audit, fund managers often conduct one anyway—especially if their firm is looking to raise a new fund. That’s because audited financials show current and prospective future investors that your accounting, valuations, and controls are in order. Larger, more prestigious investors use audited financials to perform in-depth due diligence on firms they’re thinking about working with—so VCs will sometimes start auditing their previously unaudited, exempt funds when they’re raising their first institutionally-backed funds.

Can PE funds skip audits?

Unlike some early-stage VC funds, PE funds rarely have the option to skip an audit. Most PE funds work with institutional LPs—pension funds, endowments, insurance companies—that contractually require annual audited financial statements. Additionally, PE funds that use leverage (credit lines or borrowing facilities) are often required by their lenders to provide audited financials annually. If your fund falls into either of these categories, an annual audit is effectively mandatory.

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Private fund audit process

The audit is best understood not as a single event, but as a year-long cycle that requires continuous preparation and communication. For a fund with a December 31 year-end, the timeline is typically broken down into the following phases, each with its own set of tasks and priorities. The following is an ideal audit timeline for private funds, but of course it’s not always possible to stick to in practice.

July/August: Finding an auditor

For funds whose fiscal year ends on December 31, audits generally begin in January and occur on an annual cycle. As a fund manager, you’ll need to start evaluating prospective auditing firms in July or August if you want to have your fund audited in January, and the audit completed by the relevant deadline.

Start of Q3: Contract a firm and begin interim testing

Ideally, you’ll engage an auditing firm by the start of Q3. Your auditor’s interim testing will typically begin in the third quarter. This is a preparatory phase of the audit cycle, when auditors begin reviewing your fund’s cash-related events—things like capital calls, distributions, investment purchases, and sales. Interim testing gives your auditor a head start on making sure your financial reports can be issued on time.

During Q3: Prepare documentation

During Q3, your auditors will also send a “provided by client” (PBC) information request list, which itemizes the documentation you’ll need to send them. As the GP of the fund, it’s your job to assemble and prepare these documents for your auditor’s inspection. This might sound simple, but it can become a serious burden for fund managers who lack the support of a fund administrator.

Carta simplifies this step by providing the information directly to auditors and flagging any missing items.

Q1: Valuation testing and auditing begins

Audits also usually begin in January. Following this ideal timeline means your audit firm has already finished initial audit scoping and performed testing over transactions that have occurred for the first through third quarters. By January, they can focus on procedures they need to perform to review Q4 transactions and valuation of portcos.

Some fund managers are pushing further, targeting full audit completion by end of January—weeks ahead of the traditional March/April deadline. The funds most successful at hitting this accelerated timeline share a common approach: They complete their portfolio valuation work during Q3 of the prior year, rather than waiting until year-end. Getting valuations done early means your auditors can begin substantive procedures in Q4, compressing the timeline significantly. If reducing the Q1 crunch or impressing institutional LPs with a faster close is a priority for your firm, talk to your audit firm about what a January target would require.

End of March/Early April: Complete audits

The SEC’s deadline to complete audits for funds where the investment adviser is an RIA is 120 days after the fiscal year end (that is, end of April). Even if the investment adviser is not an RIA, an on-time audit must be returned in accordance with a fund’s LPA or operating agreement (usually within 90 or 120 days from the end of the previous fiscal year). Funds of funds may have up to 180 days from the end of the year to submit their audits.

GPs must complete their audits by the end of April to avoid SEC fines and penalties. Although there may not be a contractually specified financial penalty for late audits levied by LPs, there may be other factors to consider (like reputational risk and risk to future fund raising). Other stakeholders that may require audited financial statements are financial institutions (like when a fund has a line of credit or borrowing facility). While there may not be a financial penalty for a late audit, it may impact the fund’s future ability to borrow from that financial institution.

What happens if you don't plan ahead?

If you wait to engage an audit firm until January, it’s unlikely you’ll receive a timely audit in accordance with SEC regulations or within your LPA’s specified deadline. Missing deadlines is more common with first-time emerging managers who are less familiar with the audit processes. While there are typically no monetary penalties associated for exempt fund managers, missing deadlines can send a bad message to your investors.

If an RIA misses its audit deadline, it may face penalties and unhappy institutional investors. In general, this may foster mistrust in the GP.

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What do auditors look for?

To evaluate your fund’s compliance with its LPA or SEC requirements, auditors will examine financial documentation and records. They’ll look at some of the following information:

• Invoices (to confirm you’re only charging LPs for permitted expenses)

• Bank statements

• Investment transactions, including executed agreements (purchases, sales)

• Valuation support focusing on the GP's assessment (e.g., valuation model, which may be from a third party or in-house, post-money valuations, etc.)

• Management fees

• Capital calls

• Distributions

Auditors also confirm that a fund’s holdings in its portcos match those companies’ records—in other words, that you have invested what you say you did. To do this, each of your fund’s portcos will need to provide a signed audit confirmation containing certain information from their cap table, as well as information about your specific investment in the company. Portcos may be asked to provide current operational data (financials, cap table, financing status, management commentary) as part of the audit confirmation process.

After confirming ownership, auditors will look at how the fund calculated each portco’s valuation and will request the support you used in determining the valuation. This may include financial information from the portco (like budget and cash burn rate) or non-financial information (for example, progress against milestones). This can reveal misleading or inaccurate representations of a fund’s performance, or incorrect calculations of its portco fair value.

What guidelines do auditors use?

Auditors evaluate whether the fund follows U.S. generally accepted accounting principles (GAAP) or the international financial reporting standards (IFRS) (for non-U.S. domiciled funds) when recording for its transactions, including the valuation of investments. Auditors must also comply with Generally Accepted Auditing Standards (GAAS) when performing an audit.

These accounting standards provide guidance on the valuation principles outlined in ASC 820 (US GAAP) or IFRS 13 (IFRS), depending on the applicable framework, so that there is consistency for how assets are valued across the private funds industry. However, since the guidelines permit some flexibility, firms can benefit from having a clear valuation policy that outlines how they value their assets.

How to prepare for your annual audit

You can turn the annual audit from a reactive, stressful task into a smooth, repeatable process. A proactive approach centered on organization, clear documentation, and open communication is the key to a successful and less difficult audit experience.

What documents do auditors need?

Being organized is the foundation of a smooth audit. Your auditors will request a core set of documents that can be broken down into two main categories: those related to the fund itself, and those related to the companies your fund has invested in.

Fund-level documents

Documents auditors will need from your fund include:

• Fund formation documents (for example, the Certificate of Formation, IRS EIN letter)

• The fund’s governing documents (for example, the LPA or operating agreement)

• Partner agreements (for example, LP subscription documents and side letters)

• Statement of assets, liabilities, and partners’ capital

• Statement of changes to partners’ capital

• Bank account and brokerage account statements

• Schedule of portfolio investments

• Service agreements with third parties

• Expense invoices, including those for the fund’s auditor, tax provider, fund administrator, and other outsourced professional services

• Statement of cash flows (a record of all money movement into and out of the fund, including investment fundings, investor capital calls and distributions, carried interest performance fees, and expense payments)

Auditors will use these documents to validate that the transactions have occurred and that your accounting records are complete and accurate.

Portfolio company documents

Documents auditors need for evaluating portfolio investments include:

• A spreadsheet of contacts for each portco, including their names and email addresses

• Updated portco cap tables

• Most recent financial statements for each portco, dated as close to year-end as possible (like balance sheets, revenue reports, and cash burn rate/reserves)

• Financing documents related to the most recent round of financing for each portco

• Valuation model and support used in determining the fair value of the investment

Throughout the audit, your auditors will continue to request any information and documentation they think will help them gain insight into a portco’s finances and stress-test the fund’s own ASC 820 valuation of its interest in the portco.

First-time audit checklist

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What are the common fund audit challenges?

For many fund managers, the annual audit can become a stressful fire drill, driven by the significant time and resources required for compliance. For the smallest funds, audit fees alone account for a median of 12% of all fund operating expenses, underscoring how costly compliance can be. These challenges often stem from relying on manual processes and disconnected data sources, which can create bottlenecks, increase the risk of errors, and make the entire process more difficult than it needs to be.

• Chasing down documents: The process of data collection for up-to-date financial statements and cap tables from every portco can be a significant administrative burden. This is especially true when founders are busy running their own companies and may not be responsive to your requests for information.

• Valuing illiquid assets: The most complex part of a PE or VC fund audit is the valuation of private, illiquid investments. As Carta has noted, there is no widely accepted industry standard for marking portco valuations, and the resulting marks remain estimates that can be difficult to verify during an audit. These assets don't have a public market price, so their value is based on your judgment and models, which often leads to extensive back-and-forth with auditors as you work to justify the methodologies and assumptions you used.

• Reconciling disconnected data: When a fund's financial records are spread across multiple spreadsheets, bank portals, and service provider systems, the risk of error is high. Fund accounting teams manually reconciling this information is time-consuming and often results in delays and additional audit fees.

How to select an audit partner

You should choose an audit firm that has deep experience in your specific asset class, whether you manage a PE fund, hedge fund, real estate fund, or VC fund. An auditor who understands the unique nuances of your industry can provide more insightful feedback and a more efficient process. As Kar Hoe Lum, director of finance at Vickers Ventures Partners, explains during Carta’s Audit Mastery: The Essentials You’re Not Thinking About webinar: "It is very important to find an audit firm or audit partner who understands the business and industry well... we look at them as a business partner and an auditor signing on the opinion."

The size of your fund should also factor into your decision. Smaller funds—particularly those under $50 million AUM—typically get better service and more competitive pricing from regional or boutique firms that specialize in private funds. Larger funds, or those actively raising institutional capital, generally work with mid-tier or Big Four accounting firms, whose name recognition carries weight with sophisticated LPs. Matching your auditor's scale to your fund's scale means you're not overpaying for overhead you don't need, and not underserved by a firm stretched beyond its capacity.

If you’re a Carta customer looking for a referral to a suitable audit firm, reach out to your fund administration team or email Julie Latino (julie.latino@carta.com) for an introduction.

What to do after the audit

The end of the audit should be viewed as a starting point for improvement, as regulators expect firms to continually promote and improve compliance.

The audit report and any accompanying management letter comments offer a professional, third-party assessment of your portfolio monitoring and fund operations. This feedback should be used to strengthen your internal controls and improve your financial reporting processes, and many RIAs review the SEC examination priorities to ensure their policies address these areas of concern.

How Carta helps you through the audit process

Modern fund management software can transform the audit from a manual, fragmented process into a streamlined, technology-driven workflow. By centralizing your data and automating key tasks, you can significantly reduce the friction and stress of audit season, turning a compliance burden into an operational advantage.

Working with the audit team

Carta coordinates with the fund and audit teams to make sure everyone is on the same page about document delivery timelines. Our team works with you to fulfill open items on the PBC list and prepares investment and investor confirmation letters as needed.

Carta has also built an audit confirmation workflow that streamlines the confirmation process for auditors, GPs, and portfolio companies alike. Rather than chasing down confirmation letters over email, all parties complete the process directly through Carta, with status visible to everyone in real time.

Carta’s software lets you add groupings to your schedule of investments, among other detailed information you may wish to include in your audit documentation. The Carta fund administration team can generate your fund’s annotated quarterly financials with just a few clicks. Carta also provides your audit team with access to your fund’s general ledger and is the first point of contact for any additional support your auditor needs.

Coordinating with portfolio companies

To keep you ready for client audits, your fund can use Carta’s investor services platform to collect updated portco financials. If you have portcos that use Carta for cap table management, they can authorize you to access their cap tables and other financial information, to make the process of your Carta team collecting this information even smoother.

Secure document sharing

Carta fund admin software also creates connectivity in your fund’s general ledger: Auditors can click on a number in the ledger and trace the figure back to its original source document. This in-app document trail allows auditors to self-serve the documents they need, without having to request and receive them over email or a cloud server. Features like these help to minimize the number of documents you need to find, update, and send to your auditors. They also provide greater information security by reducing the amount of sensitive information you need to send by email or cloud server. This increases information security while giving auditors independent and convenient access to documents whenever they need them.

Carta's Auditor Portal also gives auditors a one-stop shop for all documentation collected throughout the year. Rather than making requests through you, auditors can self-serve the documents they need with a few clicks—reducing back-and-forth and keeping the audit moving.

To see how Carta can help you streamline your next audit with audit-defensible valuations, request a demo.

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Frequently asked questions about fund audits

How much does a fund audit cost?

Audit fees depend on your fund's size and complexity. Inefficient processes and poor documentation are significant drivers of higher costs. During a five-year investment period, the median VC fund between $1 million and $10 million spends about 3.4% of its total fund size on various operating expenses, compared to 1% for funds larger than $100 million—highlighting the cost impact of scale and operational efficiency.

How does an audit for an SPV differ from a full fund audit?

An audit for a special purpose vehicle (SPV) is typically much simpler and less expensive than a fund audit, largely because SPVs are commonly structured to invest in a single asset rather than managing a large, multi-company portfolio with more complex valuation and reporting requirements.

What happens if auditors find an error?

An error is a specific misstatement in your financial records, such as a wrong number, miscalculation, or transaction recorded incorrectly. If auditors identify one, it should be treated as an opportunity to improve rather than a cause for alarm. The auditor will flag the error, work with you to correct the affected figures, and issue a management letter with recommendations to prevent the same issue from recurring.

What if auditors identify a material weakness?

A material weakness is a more serious finding. It refers to a deficiency or combination of deficiencies in your internal controls that creates a reasonable possibility of a material misstatement in your financial statements going undetected. Unlike an error, which is a specific mistake in a figure, a material weakness is a structural problem in how your fund manages and reports its finances. If auditors identify one, your fund will need to develop a remediation plan and demonstrate to your auditors and investors that the weakness has been addressed before the next audit cycle.

Can I change auditors if I'm not satisfied?

Yes, you can change audit firms if you are not satisfied with their service. The best time to make a change is after an audit cycle is complete to ensure a smooth transition and handoff of information for the next year's audit.