U NEED TO LOOK THROUGH? ENTITIES DO YOU NEED TO LOOK k before, but maybe you need to look now SCENARIO 10 HOW MANY ENTIT You didn't look before The Situation carburgh Investments is a for various local labor unions-welfare funds, hele an investment advisory firm which manages 20 inions-welfare funds, health funds, and $50 million to $200 million in capital. Roughly 25% of centage varies from fund to fund) is invested in Morte investment funds for on. The funds vary from $50 m sich fund the exact percenta Equity, a related entin private dental ps has S that pted e, the Your firm, Danvers Acce partner responsible for the funds are relatively easy to debt; they show limiter through the report of an actu properly represented in th validity and value of the Starburgh is properly carrying out its fi Iraw entity, which generates private equity mortgages Accounting LLP, audits three of these funds. You are the ve for these audits, and this is your second year doing so. The ly easy to audit and involve minimal risk. They have almost no ow limited activity and carry few expenses. You need to confirm, port of an actuary, that what the funds are obligated to pay out is sented in the financial statements. You also need to confirm the od value of the assets that the fund invests in. You need to verify that his properly carrying out its fiduciary responsibility, by investing in a onsistent with the charters set down by the union directors of the various funds. And you need to obtain a SAS 70 review of the holder of the securities (a employed by Starburgh), to confirm that the securities actually held represent the securities owned. These audits, then, are overall fairly low-risk engagements, since you are relying on reports of the relevant experts at nearly every point. In the course of the audit, the audit manager approaches you and asks whether your firm should seek an independent valuation of the funds' investments in Mortgage Equity. You are caught off guard by the question, because Danvers has not once in the last twenty years sought such a valuation. Generally, mortgages are hof a particularly risky investment, since they have real estate as collateral. Moreover, the funds' investments in Mortgage Equity have been scrutinized and approved by the directors of the three union funds. You are unaware of GA. 18 an independent valuation in such circumstances; in fact, you are fairly it does not. And besides, each year Starburgh provides a valuation of S. produced by its own expert. So for all these reasons an nt valuation looks completely unnecessary to you. ognize, of course, that Starburgh would have an incentiv vestments, since they might be fired as fund managers if those Implied a substantial overall loss. Also, the union dire oblems that might arise. The reason is that some of the union confident that it does not. And be those investments, produced independent valuation loo You recognize, 01 problem in those investments investments implied as incentive to ignore problems that refunds, where the return on invest ve years. The higher the dues, thus keeping ther hand, the frond bold responsible by w ks you the question bat a few months ago ons in Starburgh the 170 funds are health and welfare funds, where effect on dues to be charged to union members in future of the funds, the more the directors can reduced of rank-and-file and keeping their jobs. On the oth e to lose value, the union fund directors would be held members and would probably lose their jobs. all of this is that, soon after your manager asks y Compounding all of this is that, soon after about an independent valuation, you remember that newspapers were reporting charges made by were reporting charges made by minority investors Adam Jenkinson had defrauded them. You did not give changes they seemed motivated because of personal enmitie importantly, perhaps, the union directors dismissed the Ultimately it would be the union directors who would have te expense of obtaining an independent valuation. And if you expense--and especially if you were to express any doubts about the president of Starburgh-you might endanger the retention of engagements. give much credit to the cities and jealousy. More the claims as unfounded have to approve the added f you were to insist on this out the integrity of the ion of these audin you seek an independent Question What should you do, then? All things considered, should you seek an ind valuation or not? What follows are four possible actions you can take. these are excluded, and which is best? Looking for an Answer 1. There is no need to do anything in particular. It is best, and safest, to do what your firm has always done in the past. You think this option has the weight of experience and the credibility of past practice on its side. You see no decisive e determining reason to do anything differently. 2. You should organize meetings with the investment directors of the three union funds. At these meetings, you should express your skepticism and explain that your firm will not give an audit opinion until it can reach a greater comfort level about the valuation of the investments in Mortgage Equity. 3. You should go ahead and require the independent valuation, approaches Starburgh and asking them to have it done, using a recognized and indepe expert. This would be done without consultation with the fund directors. 4. You should initiate a conversation with the three or four other au and independent which audit the other seventeen funds managed by Starburgh or other audit firms Starburgh, to find out what why. You hope in this way to confirm your mentioned, you believe that GAAS does not require your interpretation is incorrect or not up to date. firms are doing and why mation of GAAS. As mention aluation, but perhaps your int. intention below for a suggested resolution and discus Se puge 184 below U NEED TO LOOK THROUGH? ENTITIES DO YOU NEED TO LOOK k before, but maybe you need to look now SCENARIO 10 HOW MANY ENTIT You didn't look before The Situation carburgh Investments is a for various local labor unions-welfare funds, hele an investment advisory firm which manages 20 inions-welfare funds, health funds, and $50 million to $200 million in capital. Roughly 25% of centage varies from fund to fund) is invested in Morte investment funds for on. The funds vary from $50 m sich fund the exact percenta Equity, a related entin private dental ps has S that pted e, the Your firm, Danvers Acce partner responsible for the funds are relatively easy to debt; they show limiter through the report of an actu properly represented in th validity and value of the Starburgh is properly carrying out its fi Iraw entity, which generates private equity mortgages Accounting LLP, audits three of these funds. You are the ve for these audits, and this is your second year doing so. The ly easy to audit and involve minimal risk. They have almost no ow limited activity and carry few expenses. You need to confirm, port of an actuary, that what the funds are obligated to pay out is sented in the financial statements. You also need to confirm the od value of the assets that the fund invests in. You need to verify that his properly carrying out its fiduciary responsibility, by investing in a onsistent with the charters set down by the union directors of the various funds. And you need to obtain a SAS 70 review of the holder of the securities (a employed by Starburgh), to confirm that the securities actually held represent the securities owned. These audits, then, are overall fairly low-risk engagements, since you are relying on reports of the relevant experts at nearly every point. In the course of the audit, the audit manager approaches you and asks whether your firm should seek an independent valuation of the funds' investments in Mortgage Equity. You are caught off guard by the question, because Danvers has not once in the last twenty years sought such a valuation. Generally, mortgages are hof a particularly risky investment, since they have real estate as collateral. Moreover, the funds' investments in Mortgage Equity have been scrutinized and approved by the directors of the three union funds. You are unaware of GA. 18 an independent valuation in such circumstances; in fact, you are fairly it does not. And besides, each year Starburgh provides a valuation of S. produced by its own expert. So for all these reasons an nt valuation looks completely unnecessary to you. ognize, of course, that Starburgh would have an incentiv vestments, since they might be fired as fund managers if those Implied a substantial overall loss. Also, the union dire oblems that might arise. The reason is that some of the union confident that it does not. And be those investments, produced independent valuation loo You recognize, 01 problem in those investments investments implied as incentive to ignore problems that refunds, where the return on invest ve years. The higher the dues, thus keeping ther hand, the frond bold responsible by w ks you the question bat a few months ago ons in Starburgh the 170 funds are health and welfare funds, where effect on dues to be charged to union members in future of the funds, the more the directors can reduced of rank-and-file and keeping their jobs. On the oth e to lose value, the union fund directors would be held members and would probably lose their jobs. all of this is that, soon after your manager asks y Compounding all of this is that, soon after about an independent valuation, you remember that newspapers were reporting charges made by were reporting charges made by minority investors Adam Jenkinson had defrauded them. You did not give changes they seemed motivated because of personal enmitie importantly, perhaps, the union directors dismissed the Ultimately it would be the union directors who would have te expense of obtaining an independent valuation. And if you expense--and especially if you were to express any doubts about the president of Starburgh-you might endanger the retention of engagements. give much credit to the cities and jealousy. More the claims as unfounded have to approve the added f you were to insist on this out the integrity of the ion of these audin you seek an independent Question What should you do, then? All things considered, should you seek an ind valuation or not? What follows are four possible actions you can take. these are excluded, and which is best? Looking for an Answer 1. There is no need to do anything in particular. It is best, and safest, to do what your firm has always done in the past. You think this option has the weight of experience and the credibility of past practice on its side. You see no decisive e determining reason to do anything differently. 2. You should organize meetings with the investment directors of the three union funds. At these meetings, you should express your skepticism and explain that your firm will not give an audit opinion until it can reach a greater comfort level about the valuation of the investments in Mortgage Equity. 3. You should go ahead and require the independent valuation, approaches Starburgh and asking them to have it done, using a recognized and indepe expert. This would be done without consultation with the fund directors. 4. You should initiate a conversation with the three or four other au and independent which audit the other seventeen funds managed by Starburgh or other audit firms Starburgh, to find out what why. You hope in this way to confirm your mentioned, you believe that GAAS does not require your interpretation is incorrect or not up to date. firms are doing and why mation of GAAS. As mention aluation, but perhaps your int. intention below for a suggested resolution and discus Se puge 184 below