August 1, 2019

CCO Series (2019) - Financial Statements

The financial statements that you maintain for your RIA firm, which include income statements, balance sheets, statements of cash flows, are powerful tools. Apart from the fact that they are a required to be maintained for books and records purposes, the data that they contain hold the key to many other critical regulatory and practice management activities.

RIA Financial Statements In a Nutshell

Maintaining complete and accurate financials on your business simply makes good business sense. However, the primary purpose here is the maintenance of financial statements for compliance purposes, which may include:

  • Balance Sheet and Income Statement
  • Cash Journals - Documentation including cash receipts and disbursements, records, and any other records of original entry forming the basis of entries in any ledger
  • Banking Information - All checkbooks, bank statements, cancelled checks and cash reconciliations for your firm
  • Business Expenses - All bills or statements (paid or unpaid) relating to the business of your firm
  • Other Financial Statements - All trial balances, financial statements, and internal audit working papers relating to the business of the firm

While maintaining proper financial statements is required in order to avoid regulatory sanctions, it can also be a useful tool for RIAs. Creating and reviewing financial statements on a regular basis can prove to be an indicator of the health of the firm. The financial statements can demonstrate that the firm is performing as intended and disclosed, or act as a tool to show areas where it can improve. Ensuring financial stability of a firm is an important step in gaining client and regulatory confidence. Proving to be solvent and possess secure financials could be the difference between gaining and losing clients, or spending more time with regulators during an exam.

State Specific Requirements

Many of the regulations regarding financial statements for RIAs are dependent on the advisor’s principal state of business. Along with U.S Securities and Exchange Commission ("SEC") requiring specific actions regarding financial statements, each state also has specific requirements on the issue. It is important to recognize your specific state’s requirements in order to avoid unnecessary regulatory issues. Currently, there are states that require financial statements to be sent to their state regulatory agency each year. This applies only if the firm is registered with the state, and does not apply to SEC registered firms.

It is important to stay updated on your specific state’s requirements in order to avoid unnecessary regulatory issues. Depending on the state, there may be minimum net worth requirements that are to be demonstrated through the financial statements. Where applicable, your firm’s books and records archive should contain the necessary financial statements.

Through the Regulator's Eyes

Regulators have put an emphasis on monitoring the financial statements of newly-registered advisors. If they are not completed correctly, it may be a sign that a further examination is needed. Accurate financial statements prove to the regulators that the firm is running effectively. Proper maintenance and submission, if required, of updated financial statements is one key way to avoid regulatory sanctions.

CCO Best Practices

  • Do not approach financial statements as just a way to avoid regulatory sanctions. They are important at spotting financial irregularities which might benefit you.
  • Utilize financial statements as a powerful tool to indicate advisory effectiveness and compliance.
  • Always stay informed of specific state requirements, which may differ from SEC and other states’ regulations.
  • Maintain accurate financial statements, in accordance with generally accepted accounting principles (GAAP).

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program.  Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

Thomas Yates


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