Making assurance work for you: Financial statement assurance options for family offices

When we speak with family offices and private businesses about assurance, it usually means answering these questions: 

• Have I met all the regulatory requirements? 
• What are my assets worth, and what proportion do I own? 
• Do I have clear data to collaborate with other investors and execute on opportunities? 
• What are my risks, and do I capture the right information to manage them? 

As a beneficiary, you almost certainly do not want to be involved in the day-to-day running of your family office, but you do need the peace of mind that your wealth is in safe hands. Assurance can help provide comfort about the processes and controls in place within the family office, as well as the accuracy and reliability of the financial data you receive from your teams.  

This is not a new issue; it has been high on the agenda of family offices for years. However, with the ever-increasing complexity of family office investment strategies, it needs more attention than ever before.   

Instead, the annual compliance cycle often takes priority, and understandably so. But once that is under control, attention needs to turn to the strength of the internal reporting and whether, as ultimate beneficial owners, you are getting a full and accurate picture of how your wealth is performing and the position at any point in time. Better data means better decisions. 

This is where assurance engagements can help. They can take a variety of forms, but the fundamental concept is consistent: A qualified practitioner provides a conclusion in relation to a specific subject matter. In many cases, this is the financial statements or an area of the financial statements, but assurance can also include other aspects of the family office operations, including internal controls and governance. 

This assurance not only drives better governance in your family office but also opens possibilities for co-investment strategies, obtaining outside capital to leverage the skilled investment office you’ve built, and giving comfort to multiple beneficiaries, charities, and others you are building wealth for.   

There are two types of assurance: Reasonable and limited.  The difference between them is primarily the quantity and quality of evidence sought and the type of conclusion that is reached.  

A reasonable assurance engagement would provide a positive opinion, for example, that “…the subject matter information is prepared, in all material respects, in accordance with the applicable criteria”.  In contrast, a limited assurance engagement would provide a negative conclusion, such as that “…based on the procedures performed and evidence obtained, no matter(s) has come to our attention that causes us to believe that the subject matter information is not prepared, in all material respects, in accordance with the applicable criteria”.   

Absolute assurance is never possible due to inherent limitations in the availability of evidence. 

The most commonly known example of a reasonable assurance engagement is the statutory audit of the financial statements.

An audit involves a qualified firm of auditors carrying out an examination of an entity’s financial statements. The output is an independent opinion on the contents of those financial statements, provided by an audit report signed in the audit firm’s name. The work required to be performed is governed by International Standards on Auditing (UK), which exist to ensure that audits performed in the UK are of the required quality and are consistent across all providers.

Most companies or limited liability partnerships (LLPs) registered in the UK that are classified as medium in size or larger in accordance with the Companies Act 2006 (CA06) size thresholds are required by law to obtain a statutory audit and file a set of accounts that contain an audit opinion at Companies House. Other jurisdictions differ. Some, such as the British Virgin Islands, have no statutory audit requirements at all; others (such as Guernsey) have statutory requirements but generally permit a resolution passed by members to determine that an audit is not required.  

Where an entity is not UK registered and has no local equivalent requirement, or is UK registered but does not meet the size thresholds, an audit may still be mandated. Audits are sometimes required by underlying investor or shareholder agreements. Bank funding also often includes a requirement for an audit as part of the loan covenants. 

But even if an audit is not required, many clients choose to have one because of the benefits an audit opinion can bring. 

There are several of these:  

• Comfort and transparency – The key benefit of an audit is that it provides an independent opinion from a qualified third party for those engaging the auditor and other stakeholders. It ensures the transparency of the financial information reported to them and increases accountability for the finance teams responsible for it. Ultimately, the process allows those using the audit to make better informed and more timely strategic decisions 
• Identification of deficiencies and errors – An audit process is thorough, and the procedures performed often lead to the identification of errors in the underlying data, which can then be corrected.  As well as identifying unintentional oversights and misstatements, it can highlight instances of management bias or override. This considerably improves the accuracy and reliability of data reported by finance functions 
• Credibility of the financial data reported – Even if an audit report is formally addressed to one set of users, such as the members or trustees of the family office, the knowledge that the financials have been audited by an independent qualified professional (albeit on a non-reliance basis) can give others confidence and comfort. It can enhance credibility with external stakeholders, such as banks or potential co-investors 
• Additional benefits beyond financial verification – A fresh pair of eyes often brings valuable insights into the business, and audit procedures frequently identify weaknesses in the control environment. These can result in tailored recommendations for improvements to processes, which, when implemented, can strengthen systems and controls 
• Enhancing the quality and professionalisation of the finance function – An annual audit cycle brings discipline to the finance team through the knowledge that they will need to provide robust information that is ready for audit. This enhances day-to-day record keeping and transactions processing, leads to improvements in reviews and reconciliations and ensures finance staff take ownership of their output 
• A track record for co-investments and outside partnerships – Many family offices end up building an investment machine that rivals modern professional outfits. Often, this results in other family offices or investment firms seeking to invest, which represents a significant potential revenue stream for the family office. Audited information creates a verifiable track record that leaves the door open for these opportunities. 

If an audit is undertaken on a UK-registered entity, it will be a statutory audit on a set of statutory financial statements. If the audit is undertaken on a non-UK registered entity or performed only for internal purposes, it will be a non-statutory audit of a non-statutory set of financial statements.   

A full audit assumes that the entity applies a recognised financial reporting framework, such as UK accounting standards, the United Kingdom Generally Accepted Accounting Practice (UK GAAP), or International Financial Reporting Standards (IFRS). 

Aside from a full audit, there are several other assurance engagement alternatives: 

This type of audit is very similar to the full audit described above, but it involves performing an audit of financial statements prepared in accordance with Special Purpose Frameworks. 

Such a situation is common in family office structures choosing to produce accounts in accordance with a recognised framework but not wishing to apply the standards in full. They therefore use UK GAAP/IFRS with certain deviations or even apply their own accounting policies rather than a recognised framework. 

• Benefits: This type of engagement enables users to obtain the comfort that a full audit process has been undertaken, even if they choose to prepare accounts under their own accounting policies 
• Disadvantages: While the majority of the audit process is identical to a full audit and the audit report is similar in content, it does contain an “emphasis of matter” paragraph to alert users that the framework may not be suitable for other purposes 

This type of audit is specifically related to audits of single financial statements or specific elements, accounts or items of financial statements. Such an engagement may be appropriate if, for example, a family office only wanted an audit of its balance sheet or a specific asset class within the balance sheet.   

• Benefits: The audit procedures performed are only focused on the areas specified, so it has a substantially narrower scope than a full audit, and the process can be considerably less onerous for the finance team  
• Disadvantages: Despite the limited scope, a large part of the overall audit process, in terms of the planning and completion phase, is consistent with a full audit, so the process can feel disproportionate to the area on which the audit opinion is issued 

This type of engagement is a limited assurance engagement, so the opinion issued is a negative opinion, as outlined earlier in the article. The procedures required are usually limited to management inquiry and analytical procedures. 

The output format is an ISRE 2400 report, which will be included within the signed financial statements. 

• Benefits: The procedures required are significantly less than any of the audit options, and yet still enhance the credibility of the unaudited financial statements for stakeholders 
• Disadvantages: The report issued expressly states that the work performed is not comparable to the procedures that would be performed under an audit engagement 

The output of an agreed upon procedures engagement is a report on factual findings.  The report is a separate document issued directly to the engaging party. 

All procedures are agreed with the family office before the work is undertaken, and it is against each of these procedures that the accountant reports its findings (or the fact that there are none). 

• Benefits: This type of engagement is entirely bespoke, and therefore can be tailored to provide detailed findings over whichever area is of most interest to the beneficiaries 
• Disadvantages: No conclusion is issued about the financial information as a whole, and there will be no report included within the financial statements. The report is for internal purposes only. In addition, the procedures must be factual only, and no judgement or opinion can be exercised by the auditor 

If the assurance need is not driven by legal requirements, this can be a difficult question to answer. Our tool below may help with the thought process.