3 Advantages of an Agreed-Upon Procedures Engagement for a Family Office

A family office – a private wealth management firm set up to manage one or more high-net-worth families’ investment and financial needs – is typically responsible for personalized investment management services. This may include managing a diversified set of securities, including funds, across a variety of asset classes. Investment objectives may be customized for individual family members, but the end goal is preserving and growing the family’s wealth.

Due to the complexity of many family office structures, the family that is funding the office should consider implementing additional measures to ensure accurate and efficient reporting. This can be accomplished through an Agreed-Upon Procedures (AUP) engagement.

An AUP is an engagement in which a practitioner (e.g., CPA firm) performs procedures defined and agreed to in advance by both parties and issues a written report on the completed procedures and findings. The end result is a transparent report that satisfies the needs and concerns of the family office and individual family members. As such, a family office can customize the parameters within the engagement to best fit its needs. Common procedures include recalculating management and incentive fees, evaluating the family office’s internal controls, and validating the valuation of assets held by the family office.

Here are three key advantages of an AUP engagement:

1. Quality Control. Due to the potentially vast size of a family’s wealth, the structure of a family office setup could vary. One common structure involves the creation of multiple limited partnerships (i.e., investment funds) underneath the family office, who acts as general partner, to house different asset classes (e.g., domestic equity, international fixed, private equity, etc.). In this case, the family office team would be managing a significant sum of assets allocated among several funds, each with its own set of terms, conditions, and investment objectives. Through an AUP engagement, the practitioner can perform testing on specific facets (e.g., authorization of withdrawals from the investment funds) of the family office to observe whether errors were made or whether weak points in current operations exist.

Evaluation of internal controls and recalculations of relevant amounts are areas where quality control issues are commonly found. For example, procedures performed might uncover a timing delay as it relates to the implementation of amended fee terms or potential shortfalls in controls associated with account transfers, which can be costly to the family office. Along with detailing any findings noted from procedures performed in the AUP report delivered to the family office, the practitioner might also provide a detailed schedule of comments to management on the exceptions noted. These comments, typically in the form of best practices, can be invaluable toward the improvement of continued and future operations.

2. Transparency. As the high-net-worth family or the family’s representatives are directly involved in establishing the procedures performed, insight can be found into areas of interest or concern to ensure the family office is functioning as intended. The practitioner provides services from an unbiased, third-party perspective with any issues observed being directly communicated to management and the family. AUP engagements are performed under the American Institute of Certified Public Accountants (AICPA) Statements on Standards for Attestation Engagements (SSAE). Such standards require that the structure of an AUP report list the exact procedures performed and the related findings without being vague and including terms of uncertain meaning. This way there is no ambiguity in the results and the family office or the family’s representatives have a clear and transparent report to evaluate operations or whatever subject matter is important to them and agreed-upon.

3. Flexibility. The structure of an AUP engagement allows the family office to customize the procedures performed to target areas of greatest concern, which differs from the compliance-focused nature of a financial statement audit. Financial statement audits provide assurance that financial statements and related footnotes of the family office or the respective limited partnerships are not materially misstated; however, an audit opinion may not necessarily address specific concerns the family might have regarding the office’s internal operations. This is due in part because financial statement audits are generally not designed to provide an opinion on the effectiveness of internal controls.

An AUP engagement provides the flexibility to perform specific procedures on a subject matter, which may be financial or nonfinancial. Because the needs of the family office may vary widely, so too can the nature, timing, and extent of the procedures requested to be performed. Family offices may find it beneficial from a budget perspective to utilize a combination of audits and an AUP engagement, or depending on its needs, may choose to solely go the route of an AUP engagement. AUP engagements are also entirely flexible in terms of cost due to their customized nature. Family offices can go deep or perform many (i.e., higher cost) or stay on the surface or perform fewer (i.e., lower cost) procedures to gain the comfort that they need.

In conclusion, a family office should consider implementing an AUP engagement to generate a higher degree of confidence in its internal operations and leverage the skills and abilities of the practitioner to gain additional insight into areas of interest. The quality control, transparency, and flexibility aspects of an AUP engagement serve as significant advantages to consider when selecting an avenue for risk management within the family office.

If you have any questions about this information or would like to discuss your firm’s needs, please contact Kreischer Miller’s Investment Industry Group.


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