We are in the process of setting up a small fund. I don’t want to use the word “hedge fund” because we really will take positions rather than try to run a balanced book.
And we need to choose an audit firm. We won’t use leverage, we will be global and we intend on having proper third-party custody arrangements. We should present low audit risk –we will pass the simple due-diligence tests which Madoff (should have) failed.
Our current choice is a medium sized West Coast firm – a big name in San Francisco – but generally unknown outside that foggy town. They have a professional staff of about 100 – they are not a fly-by-night three person operation.
However in the post-Madoff era the words “who is that auditor?” have a different meaning. We are leaning towards a bigger name auditor – a big four firm. That is a pity because our auditor has genuine expertise – we chose the partner because we like and trust him. He will help keep us out of the many international tax problems that could befall a global fund for American partners running out of Australia.
The smaller firm in our opinion offers genuinely less risk (namely tax risk) for us and our clients and at a lower cost than a big four firm.
So – how do people really feel about the 100 professional audit firm? We want to use them. Will it matter that you – our potential clients – have not heard of them?
And does it make any difference that three of the big four and the number 5 audit firms are all likely to face serious Madoff problems because they audited Madoff feeders? It is going to be problematic for everyone now that Ernst and Young, KPMG and PWC all have a reasonable chance of failing as a result of auditing Madoff feeder funds. (It seems that they spectacularly failed to do their job.)
This leads to another policy question: how do you build another big four (or six). This four are all discredited! Is there a role for an accounting firm with 200 partners capitalised with 200 million dollars? How do you do start that sort of thing anyway?