When private foundations invest in alternative investments, their managers also need to ensure that their financial statements properly reflect those holdings. The existence and the valuation of an alternative investment is the responsibility of the private foundation’s management.
With respect to existence, the auditors will be required to determine that the investments exist at the financial statement date and that the related transactions have occurred during the period. With respect to valuation, the auditor will need to determine if the investments are accurately stated at fair value. This is often more complicated as alternative investments are not publicly traded on an active market.
Because management is responsible for these aspects, management must have proper controls in place and an adequate understanding of the investments the foundation is making. A foundation can develop this understanding by performing due diligence on the investment before purchasing it; monitoring the investment continuously; and having financial reporting controls related to the accounting and reporting of the investment.
For the auditors, they will need to evaluate the adequacy of the foundation process to support the valuation and existence of the alternative investments. The auditors will also have to evaluate the quantity and quality of the audit evidence available. The auditors’ risk assessment should consider factors such as:
Materiality of the alternative investments
Nature and extent of management’s process and controls related to alternative investments
Degree of transparency available to management to support its valuation process
Complexity and liquidity of the alternative investments