Streamlining Cayman Liquidations: When an Audit Waiver Makes Sense
EisnerAmper Cayman recently assisted a client in successfully deregistering and dissolving their fund by utilising a less commonly applied mechanism available to voluntary liquidators, which enabled the fund to dispense with the requirement for a final audit.
While this option is not appropriate for every scenario, it can be a valuable tool when applied correctly, particularly when operational challenges make obtaining an audit difficult.
CIMA Deregistration and Audit Waivers
Under the Mutual Funds Act and Private Funds Act, regulated entities must file audited accounts with the Cayman Islands Monetary Authority (CIMA). However, in cases where a fund is undergoing voluntary liquidation, it’s possible to apply for an audit waiver, governed by CIMA’s Regulatory Policy on Exemption from Audit Requirements for a Regulated Mutual Fund.
This waiver provides an alternative solution for funds that, due to certain operational or logistical issues, are unable to complete a full audit but still need to deregister and wind up their affairs.
Relevant Exemption for Voluntary Liquidators
According to Section 5.4.6 of CIMA’s Regulatory Policy, an audit waiver may be granted when a fund is being voluntarily liquidated and a third-party liquidator has been appointed. The liquidator is responsible for conducting a comprehensive review of the fund’s financial activities since the last audited period. This review serves as a substitute for a full audit, ensuring key areas such as financial reconciliation, solvency, and shareholder activity are adequately addressed.
Case Study: Successful Audit Waiver for a Longstanding Fund
In a recent engagement, Timothy Womack and John Henry of EisnerAmper Cayman were appointed as the joint voluntary liquidators for a longstanding fund with multiple outstanding audits. The fund had been winding down its operations but encountered difficulties due to a lack of cooperation from service providers and insufficient documentation to support full audits. Several investors had been redeemed but remained unpaid, further complicating the situation.
The fund’s principals had attempted to secure an audit waiver but were unsuccessful. Facing statutory deadlines and limited cash reserves, the client engaged EisnerAmper Cayman to help manage the liquidation and pursue a fresh audit waiver application.
Upon appointment, we engaged with CIMA to discuss the fund’s situation. Our team conducted an in-depth review of the fund’s financial activities, reconciling its records and confirming that no inconsistencies existed that would prejudice stakeholders. Based on this review, we submitted a renewed audit waiver application and report to CIMA, which was successfully granted.
When Does an Audit Waiver Make Sense?
An audit waiver should only be considered in scenarios where it’s the most appropriate course of action. The aim is not to bypass the audit for convenience, or to avoid scrutiny, but to tailor the wind-down process to the realities of a fund’s situation. Common scenarios include where a fund has operational challenges that mean a full audit is not feasible, such as holding incomplete records, or where fiduciaries are uncontactable. Circumstances may also exist where there is little benefit to stakeholders for an audit to be undertaken, both in terms of time and cost; this can be taken into account as part of the waiver application.
In all cases, the voluntary liquidator must make sure that applying for the waiver is in the best interest of the fund and its stakeholders. The integrity of the liquidation must not be compromised, and no creditors or investors prejudiced. CIMA has ultimate discretion as to whether it will grant a waiver.
Key Considerations for Directors and Managers
If you are considering an audit waiver for your fund’s voluntary liquidation, it’s essential to take the following steps:
- Early involvement of voluntary liquidators makes sure that communication with CIMA is efficient, informed and the waiver application process meets its requirements.
- Maintaining sufficient records for the liquidator’s review to support the waiver application.
How EisnerAmper Cayman Can Assist
The team at EisnerAmper Cayman has extensive experience navigating the audit waiver process for funds in voluntary liquidation. Our approach makes sure that the waiver application meets CIMA’s requirements while protecting stakeholder interests.
- We fulfill the statutory role of third-party liquidators, overseeing the liquidation process and conducting the financial review in accordance with CIMA’s regulations.
- Our team’s review covers all financial aspects to maintain transparency and compliance.
- We work closely with CIMA to make sure that audit waiver applications are fully aligned with regulatory requirements.
An audit waiver, when used in the right circumstances, can streamline the liquidation and deregistration for regulated funds without compromising the integrity of the process. At EisnerAmper Cayman we have the knowledge to guide you through this while maintaining compliance with CIMA’s requirements and protecting stakeholder interests.
If your fund needs to be wound down, contact us today to discuss how we can assist.
Service Team
John Henry Partner D: +1 345-525-7134 E: jhenry@eisneramper.ky |
Tim Womack Partner D: +1 345-322-4255 E: twomack@eisneramper.ky |
Liam Hardie Senior Manager D: +1 345-924-5097 E: lhardie@eisneramper.ky |
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Accounting Standards Update (ASU) 2015-09, Disclosures about Short Duration Contracts
ASU No. 2015-09 focuses on improving existing disclosure requirements to all insurance entities that issue short-duration contracts. The main improvements provide increased transparency of significant estimates in measuring the liabilities for unpaid claims and claims expenses and provides additional information to analyse the amount, timing and uncertainty of cash flows from insurance contracts and development of claims estimates. An in-depth discussion of these improvements can be found at our website: ASU 2015-09
Amendments
Required disclosures (RD) to be included in the notes to the financial statements:
- Incurred and paid claims development tables by accident year for the most recent reporting period.
- A reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability with separate disclosure of reinsurance recoverable.
- For each accident year presented, total of incurred but not reported (IBNR) liabilities plus expected development on reported claims accompanied by description of reserving methodologies (and any changes thereto).
- For each accident year presented, quantitative information about claim frequency accompanied by a qualitative description of methodologies used for determining claim frequency information (and any changes thereto).
Required supplementary information (RSI) disclosure to be included either in the notes to the financial statements or as a separate schedule:
- Incurred and paid claims development tables by accident year for all years except for the most recent reporting period.
- For all claims except health insurance claims, the average annual percentage payout of incurred claims by age.
RD’s plus RSI’s and their audit considerations:
Required disclosures
In forming an opinion, amongst other considerations the auditing standards require the auditor to consider the compliance of the financial statements with accounting principles generally accepted in the United States (US GAAP). If financial statements do not fully comply with US GAAP (including, but not limited to, omissions or errors) the auditor will need to assess the significance of the matter in forming an opinion. Depending on the significance of the matter the auditor may consider modifying the opinion. The auditor will need to assess each scenario individually based on facts and circumstances.
Required supplementary information
The RSI is not part of the basic financial statements, however, the information is considered to be an essential part of financial reporting by the relevant standard setters. In general, standard setters do not expect the auditor’s opinion on the fair presentation of such financial statements in accordance with the applicable financial reporting framework to be affected by the presentation by the entity of the RSI or the failure to present some or all of such RSI.
The audit standards require that the auditor perform some limited procedures on RSI which includes but is not limited to:
- Inquire of management;
- Compare the information for consistency with (i) management’s responses to the foregoing inquiries, (ii) the basic financial statements, and (iii) other knowledge obtained during the audit of the basic financial statements; and,
- Obtain certain written representations from management.
Audit report considerations:
- If all or some of the RSI is presented, the audit report will include additional communications in an “Other Matter” paragraph that is not considered a modification to the audit opinion as follows:
- A statement that the RSI is required under US GAAP to supplement the basic financial statements.
- A statement that the RSI, although not part of the basic financial statements, is required by the Financial Accounting Standards Board (FASB), who considers it an essential part of financial reporting.
- If we are able to complete the procedures required by auditing standards:
- A statement that we have applied certain limited procedures to the RSI, including a summary of the basic procedures;
- A statement that we do not express an opinion or provide any assurance on the RSI.
- If we are unable to complete the procedures required by auditing standards:
- A statement that we are unable to apply certain limited procedures to the RSI and the reason;
- A statement that we do not express an opinion or provide any assurance on the RSI.
- If some of the RSI is omitted, we will include in the “Other Matter” paragraph the following:
- A statement that management has omitted the missing RSI required by US GAAP;
- A statement that such missing RSI, although not part of the basic financial statements, is required by FASB, who considers it an essential part of financial reporting;
- A statement that our opinion on the basic financial statements is not affected by the missing RSI.
- If the measurement or presentation of the RSI departs materially from US GAAP, a statement that although the auditor’s opinion on the basic financial statements is not affected, material departures from prescribed guidelines exist, including a description of the departure.
- If the auditor has unresolved doubts about whether the RSI is measured or presented in accordance with prescribed guidelines, a statement that although our opinion on the basic financial statements is not affected, the results of the limited procedures have raised doubts about whether material modifications should be made to the RSI for it to be presented in accordance with guidelines.
- If all of the RSI is omitted, the “Other Matter” paragraph should include (e) above.
The auditing standards generally accepted in the United States of America, AU-C Section 730: Required Supplementary Information, contains illustrative examples of Other Matters paragraphs addressing the scenarios discussed above.
AU-C Section 730 par. A3: Illustration 1- The Required Supplementary Information Is Included, the Auditor Has Applied the Specified Procedures, and No Material Departures Have Been Identified
US GAAP requires that the required supplementary information on page XX be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by FASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.
AU-C Section 730 par. A3: Illustration 2 – All Required Supplementary Information Omitted
Management has omitted the required supplementary information that US GAAP requires to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by FASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.
AU-C Section 730 par. A3: Illustration 3 – Some Required Supplementary Information Is Omitted and Some Is Presented in Accordance With the Prescribed Guidelines
US GAAP requires that the included supplementary information be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by FASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with evidence sufficient to express an opinion or provide any assurance. Management has omitted [the missing required supplementary information] that US GAAP requires to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by FASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.
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GAIM Ops Cayman 2016 Poll Results
The results can be viewed below or a PDF version of the report can be downloaded here: GAIM 2016 Survey Results
- Introduction
- Results:
- Hedge Fund Investor: What’s New and What’s Changed
- Calling All Regulators: Active and Recently Retired Regulators Prepare You for What’s Next
- The Evolving Business Model for Hedge Funds: Looking at the Future Model of Sustaining, Growing and Innovating
- Institutional Investor Perspective: The Future Partnership with Managers
Introduction
In March 2016, EisnerAmper had the opportunity to participate in the annual GAIM Ops Cayman conference, one of the hedge fund industry’s leading operations and compliance events.
This year’s gathering brought together close to 500 operations, due diligence and compliance experts from the alternative investment industry. C-level personnel and fund managers made up the largest percentage of the attendees.
Over the course of the conference, the audience was polled on a variety of topics. The following report details those results.
As you review the responses, we want to offer our own insight to provide a more complete and in-depth look at the findings:
The Evolving Business Model for Hedge Funds
Fifty-five percent of respondents indicated the commingled hedge fund is not an endangered species.
While the commingled fund may not become extinct any time soon, the 2×20 pricing structure is long gone for equity based strategies. The 1.5×20 fee structure has grown in popularity due to pressure from the institutional investment community resulting from underperformance in recent years.
We anticipate that you will find hurdle rates incorporated into the incentive fee structure, wherein a manager must outperform a stated rate of return (e.g., 10-year bond) before the incentive can be taken.
Institutional Investor Perspective
More than 75% of respondents would consider increasing or beginning pursuing opportunities through liquid alternative products.
Liquid alternative mutual funds took off like wildfire from 2012-2014 as the number of new funds grew and AUM ballooned. However, for investors looking to gain access to certain strategies, the daily liquidity requirements for a liquid alternative mutual fund often prohibit certain securities and asset classes being included in the fund. These strategies are only accessible in a traditional commingled hedge fund structure.
More than half of the respondents felt it was important to meet personnel beyond the senior management team during operational due diligence (“ODD”) visits.
Post-Madoff, the role of ODD has grown dramatically. Whether investors are assigning the responsibility internally or outsource it to an ODD firm, managers must make sure their firms are of institutional quality from the front-middle-back office, legal/compliance, and infrastructure perspectives to win allocations.
Results
(Click images to enlarge)
HEDGE FUND INVESTORS
What’s New and What’s Changed
Will the hedge fund industry continue to grow in assets or will there be consolidation among managers?
What is the biggest challenge facing managers today?
Where are fees heading over the next couple of years?
CALLING ALL REGULATORS
Active and Recently Retired Regulators Prepare You for What’s Next
Insider Dealing: Post-Newman, do you believe congressional action to codify “insider trading” would be beneficial?
Cybersecurity and cyber-related crime: Which elements of a cybersecurity program do you find the most difficult to implement?
Other policy and regulatory developments: Which of the following developments do you identify as the potential biggest threat to the hedge fund industry (Related to politics and regulations)?

THE EVOLVING BUSINESS MODEL FOR HEDGE FUNDS
Looking at the Future Model of Sustaining, Growing and Innovating
Is the commingled hedge fund an endangered species (and the 2 and 20 fee structure along with it)?
Which investor group(s) represents the most advantageous path for your goals in raising capital?
Should you increase or start pursuing the opportunity through liquid alternative products?
INSTITUTIONAL INVESTOR PERSPECTIVE
The Future Partnership with Managers
Who do you expect to win the U.S. Presidential election?
Demands for portfolio and operational transparency have increased dramatically over the last few years. How has your organization reacted to those demands?
Who are the most important people to meet during an operational due diligence visit?
Have you had Basel III-related conversations with your prime brokers?
Is your CCO function outsourced to a third-party compliance consultant?
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Are You a Going Concern?
The rules of US Generally Accepted Accounting Principles (GAAP) are no longer silent on management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and what management should disclose in their financial statements.
In August 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15, titled Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance about management’s responsibilities in this regard.
Guidance has been issued to reduce diversity in timing and content of footnote disclosures. Management need to consider this guidance to produce US GAAP-compliant financial statements.
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Article on FASB’s Accounting Standards Update (ASU) No. 2015-09
EisnerAmper Cayman Ltd. has posted an article with Captive Insight (www.captiveinsight.ky) and Captive Review (see article here) about the latest FASB ASU No. 2015-09.
Preparers of financial statements need to be aware of the additional disclosure requirements introduced by ASU No. 2015-09, as well as consider the time impact and increased level of detail on reserving and claims data to be compiled in order to enable preparation of financial statements that comply with accounting principles generally accepted in the United States of America (U.S. GAAP).
The article published in Captive Insight can be downloaded through the link below.
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Are You Caught In The “Offsetting” Net?
The requirements under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (GAAP) are almost identical and are required when there is netting on the balance sheet, or when there is the ability to net under an enforceable master netting arrangement or similar agreement
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Examining Confidence Levels
Funding at a consistent 70 percent confidence level will allow you to weather the ups and downs without the need to respond abruptly, and gradually accumulate equity.
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Is My Fund an Investment Entity/Company?
This is a follow up on a prevous article detailing the requirements of amendments to IFRS 10, IFRS 12 and IAS 27, issued in October 2012.
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