Fall 2008 issue of Horizons

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

• Most alternative investment funds have Dec. 31 fiscal year- ends, meaning not-for-profit organizations with different fiscal year-ends may have difficulty obtaining fair value information as of their financial statement dates. For not-for-profit organizations for which alternative investments constitute a significant portion of their assets, failure to obtain appropriate fair value information for these investments potentially could result in a scope limitation within the independent auditors’ report on the financial statements. Thus, not-for-profits should regard the proper valuing of alternative investments as an important management responsibility. Management’s Responsibility for the Valuation of Alternative Investments The responsibility for valuing alternative investments within a not-for-profit’s financial statements rests with management of the organization. This responsibility cannot be outsourced to any party outside of the organization. While management may utilize investment valuations prepared by the alternative investment fund, management should have sufficient information to evaluate and independently challenge the fund’s valuation. At a minimum, management should have a sufficient understanding of: • The nature of the underlying investments held by the alternative investment fund; • the portfolio strategy of the alternative investment fund; • and the method and significant assumptions used by the fund manager to value the underlying investments. To obtain this understanding, management should institute a system of internal control over alternative investments that encompasses the following elements: • Initial due diligence before investing in the fund. Controls might include face-to-face meetings with the fund’s management, on-site visits, reference checks and inspection of legal documents.

• Ongoing monitoring after investing in the fund. Controls might include periodic meetings with the fund’s management, on-site visits, review of SAS 70 reports for the fund (if available), review of fund reports and monitoring of fund performance. • Financial reporting related to alternative investments. Controls might include the maintenance of an investment policy by the not-for-profit organization, the formation of an investment committee, review of audited financial statements for alternative investment funds, and maintenance of a listing of alternative investments held by the organization. The AICPA Practice Aid titled “Alternative Investments – Audit Considerations” identifies additional examples of internal control procedures that a not-for-profit organization may wish to consider relative to alternative investments. Possible Sources of Fair Value Information for Alternative Investment Funds The following represent possible sources of information from which management can derive the fair value of an alternative investment. These sources may or may not be applicable for a given alternative investment. Management of a not-for-profit organization may need to determine the most appropriate method to value its alternative investments on an investment-by- investment basis. • Fair value of investments held by the alternative investment fund: As mentioned earlier, many alternative investment funds will not provide a detailed listing of investments held by the fund as they consider this information to be proprietary. However, if an alternative investment fund does provide such information, and if the underlying investments themselves have quoted market prices, management may derive the total fair value of the alternative investment fund by summing the fair values of the investments held by the fund. This total may be multiplied by the not-for-profit’s percentage interest in the alternative investment fund to arrive at the fair value of the not-for-profit’s interest in the fund.

40 ◆ fall 2008 issue