Alternative Investments and the AICPA

The Issue

In August 2005, the American Institute of Certified Public Accountants (AICPA) issued two Auditing Interpretations of Statements on Auditing Standards (SAS) pertaining to auditing fair values. (Auditing Interpretations are issued by the Audit Issues Task Force (AITF) and reviewed by the Auditing Standards Board (ASB), the senior technical body of the AICPA to provide CPAs with guidance regarding application of individual SASs in specific circumstances.)

NACUBO and higher education institutions have focused on Auditing Interpretation - AU 332 - "Auditing Investments in Securities Where a Readily Determinable Fair Value Does Not Exist."

Simply receiving a confirmation from a third party - either in the aggregate or on a security by security basis - does not in and of itself constitute adequate audit evidence with respect to the valuation assertion.
Receiving a confirmation from a third party does not constitue adequate audit evidence with respect to the existence assertion.
What may not be appropriate was clear but no guidance was provided concerning auditor judgement regarding what might be considered appropriate and sufficient audit evidence.
An Alternative Investments Task Force was formed early in 2006 to study the issues and provide recommendations.

AICPA Practice Aid

Practice aid for auditors, "Alternative Investments - Audit Considerations," released July 18, 2006 . This practice aid is the result of the proceedings of the Alternative Investments Task Force.

For a summary of the Practice Aid, view the NACUBO bulletin, AICPA Issues Practice Aid for Alternative Investments

Recommendations

The logical next steps for colleges and universities with alternative investments are:

Read the Practice Aid and related materials.
Communicate with your auditors about your institution's alternative investments and the impact of the interpretations on your financial statement audit.
Document policies regarding pre-investment and post-investment due diligence and monitoring and understanding the funds' investment strategies and calculation of fair value.
Review bond documents and other agreements that may be impacted if a scope limitation is received.

Resources

In the Know, Business Officer, July 2006. Dale Larson, director of finance, University of Dallas, and NACUBO Accounting Principles Council and AICPA task force member, offers background on the task force and advice for institutions struggling with the AICPA alternative investment rulings.
Practice Aid Summary by Dale Larson
Alternative Investments and the AICPA presented at the Campus of the Future in July 2006.
Valuation of Alternative Investments presented by John Kroll, University of Chicago and John Mattie, PricewaterhouseCoopers at the AICPA Not-for-Profit Conference in June 2006.
Pricewaterhouse Coopers Meeting the Challenges Alternative Investments monograph
Moody's article concerning alternative investments and higher education
Pricewaterhouse Coopers Institutional Oversight on Alternative Investments in the Higher Education Environment monograph
Pricewaterhouse Coopers Auditing Alternative Investments monograph
Grant Thornton's ForwardThinking: Best governance practices for not-for-profit executives and board members, special edition on alternative investments
Risk Assessment Briefs Although these are focused on the enterprise, they may be a good starting point for docmenting risk and internal controls related to alternative investments.
COSO Paper on Enterprise Risk Management
NACUBO and Pricewaterhouse Coopers developed Enterprise Risk Management in Higher Education, a white paper, the result of higher education leaders' discussion of the topic.

Do you have a good tool for enterprise risk or internal controls assessment?

If so, NACUBO would like to hear from you.

Past NACUBO Coverage

AICPA Issues Two Interpretations of Statements on Auditing Standards Regarding Investments. The NACUBO bulletin (August 25, 2005) with links to: AICPA Summary and Interpretation, Business Officer magazine article and a PricewaterhouseCoopers white paper.

NACUBO contact: Sue Menditto, director, accounting policy