The American Institute of CPAs is expressing support for a proposed accounting standards update that would require investment companies that act as “feeder funds” for other investment companies to provide better disclosures of those investments on their financial statements.

The issue of inadequate disclosures by feeder funds came to public attention after reports of Bernard Madoff’s multibillion-dollar Ponzi scheme emerged in the wake of the 2008 financial crisis. A number of outside funds had directed their investors’ money into Bernard L. Madoff Investment Securities without their knowledge and many investors lost a fortune. Many of the feeder funds were forced to agree to large settlements to compensate investors for the losses.

In the wake of the financial crisis, the Financial Accounting Standards Board was charged with improving disclosures by investment firms on a number of fronts. Last December, FASB issued an exposure draft of a proposed accounting standards update on “Financial Services—Investment Companies (Topic 946): Disclosures about Investments in Other Investment Companies.”

The AICPA’s Financial Reporting Executive Committee, also known as FinREC, submitted comments Monday on the exposure draft, expressing support for FASB’s effort to provide consistency and transparency through the alignment of disclosure and presentation requirements for investment companies regulated under the Investment Company Act of 1940 with those investment companies not regulated under the 1940 law. 

“The proposed ASU will require feeder funds (both regulated and non-regulated) to provide the master fund’s financial statements along with the feeder fund’s financial statements,” wrote FinREC chairman Jim Dolinar and AICPA Investment Companies Expert Panel chairman Brent Oswald in the comment letter. “It will also require all investment companies (regulated and non-regulated) to disclose each investment owned by an individual investee fund that exceeds five percent of the reporting investment company’s net assets at the reporting date.”

However, the AICPA also expressed some worries about the proposed changes. Dolinar and Oswald wrote that while FinREC supports FASB’s intent to align disclosure and presentation requirements for regulated and non-regulated investment companies, “we have some concerns regarding operability and auditability of the proposed disclosure and presentation requirements. We recommend that the FASB engage representatives of the AICPA (FinREC, Auditing Standards Board, and the Investment Companies Expert Panel) to discuss audit challenges relating to the proposed presentation requirement before finalizing this project. Additionally, we believe any investment company that invests substantially all of its assets in another investment company should either present the financial statements of the investee fund or provide information concerning the investments and operations of the investee fund.”

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