August 20, 2019

Recent SEC OCIE examination findings and enforcement actions have sparked a trend of increased scrutiny on fund valuation. Especially with the emergence of digital assets/cryptocurrencies as a new asset class, valuation continues to be an ever-increasing focus area of regulators. Stout recently hosted its’ annual investment fund evaluation event in New York that brought together members of the local investment community and industry experts to discuss these key issues.

The event, moderated by Stout Managing Director Jesse Morton, featured the following panelists:

  • Amit Joshi, Chief Accounting Officer, Apollo Investment Corp.
  • Thomas Friedmann, Partner, Dechert LLP
  • Will Coleman, Director, Technology Advisory Services, Cohen & Co.
  • Jamie Spaman, Managing Director, Stout
  • Matt Rogers, Director and National Leader of SEC and Accounting Advisory Practice, Stout

To kick off the discussion, Jesse Morton addressed the group on the importance of fund valuation. Listen to the recording or read the transcription below to get his perspective:

Jesse Morton:

Why are we here and why is this topic so important? Financial reporting requires that assets and liabilities must be measured at fair value, which FASB defines as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement day. While many assets and liabilities have readily determinable market values, some require fair value measurement to estimate the transaction price. Some examples include privately owned businesses, real estate, thinly traded securities, intellectual property, complex security instruments including certain dead investments, Pre ICO-digital assets and actively traded post ICO digital assets due to variances between different markets, and complications with the measurement day. 

Fair value measurement can be performed for a variety of reasons including financial statement reporting, litigation and shareholder disputes, trust, tax, and estate purposes and likely most relevant for this audience, for calculating a fund's net asset value. 

Fair value measurement can be calculated using a number of different methods and approaches and can be performed by various third parties, hopefully, Stout, or internally depending on the facts and circumstances. 

This panel is intended to explore those issues and discuss the regulatory impact when something goes wrong with the valuation, or the valuation process. That includes discussing specific enforcement actions related to issues with valuation. 

While the focus of this panel will be related to the impact of valuation to investment funds, since many of the enforcement actions have been related to investment funds, this issue is also very applicable to public companies, especially with the recent Rio Tinto and KPMG, John Gordon matters, and we'll touch upon those as well. 

Even so, the underlying issues around valuation and the best practices around valuation are similar, whether you're discussing private funds or public companies. 

With that background let's kick off the discussion.

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