In October 2022, the SEC adopted new rule and form amendments that, in part, required mutual fund and exchange-traded fund (ETF) managers to provide investors with a Tailored Shareholder Report (TSR). The goal is to provide a more concise and digestible format to retail investors, specific to share class.
But many in the industry are asking, “What role, if any, does my auditor have relative to the TSR, and how will the process work?”
The amendments note that fund managers should use audited information for the TSR (where applicable) and should derive calculations from audited information; however, there is no specific requirement that the TSR be reviewed by the auditor. As a result, it has been unclear to many, including auditors, what the role of the auditor might be.
Generally, the auditor will be required to do the following:The auditor must perform these procedures because the TSR is required to be filed as Item 1 of Form N-CSR, and the audited financial statements are required to be filed as Item 7 of the same filing with the SEC for a fund’s fiscal year.
PCAOB Auditing Standard No 2710, Other Information in Documents Containing Financial Statements, requires the auditor to read the “other” information in a filing (in this case Form N-CSR) that includes the audited financial statements and consider if the information is materially inconsistent with the information contained in the audited financial statements.
At first glance, the TSR timeline and process would seem to complement the audit process sequentially, with the TSR as the last item to be generated (right around Day 60) from the audited information (along with other information). Management produces the financial statements, the auditor audits and then the audited information is carved up or used to fulfill the new, very structured class-specific information required in the TSR.
But we expect this process will ultimately play out differently. For more than 95 percent of mutual funds and ETFs, there are no proposed audit adjustments. In those instances, the information ultimately used to create the TSR is generally available one week into the audit cycle, and in some cases even sooner. As a result, TSR reports, in most cases, can be reviewed in conjunction with financial statement drafts conservatively starting 30 days into the audit cycle. This will enable management and the audit firm to coordinate during the audit cycle regarding the shareholder reports and help alleviate pressures approaching Day 60.
The other five percent, those funds that end up with audit adjustments, will require even more coordination among their service providers to meet the 60-day deadline. While those scenarios are concerning from a time perspective, they likely don’t change the approach from the outset, as it’s often unclear whether there will be audit adjustments until well into the audit cycle.
Technology plays an increasing role in conducting audits and providing other services, and the production and analysis of the TSR is no different. Given the very structured format of the TSR by the SEC and the timeline pressures to compile TSRs for each shareholder class, there is a unique opportunity to use technology to gain efficiencies. The use of technology for the auditor starts with the output from the other service providers compiling the TSR. It will be important to understand the format in which support data will be provided to effectively configure technology and sort, analyze and compare data already gained during the audit.
Implementing the TSR will impact multiple parties and require significant communication and coordination. Advisers, administrators, printers, lawyers and auditors must all coordinate to execute practical solutions and practices to this latest filing requirement. Communicating early and often will likely lead to the best solutions — which won’t be perfect at first but will become standard business practice over time.
Additionally, we expect the TSR will become a topic of discussion between the auditor and the Audit Committee. Recall that the basis for the TSR was to provide a more digestible report for the retail shareholder, which translates to a report that will be provided directly to shareholders. In many cases, the TSR is the only report investors will review going forward.
A requirement for communication between an auditor and the Audit Committee in a filing is not new, but never has the information provided to the investor been so focused and to the point. It’s in every director’s best interest to have as many sets of eyes on that information as possible before sending it to investors. We encourage Audit Committees to engage in conversations with their auditors regarding the impact of the TSR.
Hear more from John Braun on TSRs during the Ignites webinar, “Implementing the SEC’s Tailored Shareholder Reporting Rules.” Note: you must be an Ignites subscriber to access the recording.
Contact John Braun at jbraun@cohenco.com or a member of your service team to discuss this topic further.