This article is co-authored by Jack O’Flaherty, founding partner and managing member at High Divide Management, and Henry Chavez, Principal at Spiegel Accountancy Corp.

Managers must consider the qualifications of the financial professionals they work with to ensure managerial and financial statement compliance.

Building out the financial team for your lending business or fund is an important step toward success. One of the key components of your team will be developing working relationships with outsourced CPA firms specializing in financial reporting, tax reporting, auditing, and other back-office needs.

Using outsourced CPAs offers distinct advantages to your firm because most in-house managers do not have a deep knowledge of accounting or the tax rules specific to their investment vehicles. External CPA firms provide specialized expertise in accounting and reporting, can help you navigate complex regulatory landscapes, and ensure tax compliance. Outsourcing can also be cost efficient because it eliminates the expenses associated with maintaining an in-house CPA team.

An outsourced approach grants you the flexibility to scale resources as needed to focus on core investment strategies and client relationships, while you rely on seasoned professionals to handle critical financial and regulatory tasks. By leveraging the expertise and resources of outsourced CPA firms, you can streamline operations, reduce risk, and concentrate on your firm’s growth trajectory.

Let’s look at some of the things you should consider when vetting outsourced CPAs and accounting firms.

What Services Are Needed?

Understanding which accounting services you need can be daunting. There are many accounting firms, and each seems to provide a different suite of services. What you need depends on your internal team’s capabilities, the structure of your lending entities, regulatory requirements, and investor preferences.

Here is a summary of the general categories of services to consider:

Tax Structure. Determine which tax structure will best accomplish your objectives, including whether a fund should include a Real Estate Investment Trust (REIT) structure, which provides certain tax advantages.

Tax Compliance. This involves filing the required tax returns and tests for your business and determining tax efficiencies. To the extent you run a fund, CPAs can prepare federal and state K1s that will go out to your investors. If you have a REIT, they will assist with quarterly REIT compliance and with filing required REIT tests. Everyone needs to file taxes, so you’ll need to make sure you have a plan for these services.

Audit. This involves an independent third party giving an opinion on whether you have provided an ”accurate” view of your entities’ financial situation on your year-end financial statements and footnotes. The audit firm will assign a team to your account to take a look at the internal controls governing your accounting policies and procedures. They will also test the reasonable accuracy of your year-end financial statements as well as assist in drafting your financial statements, if requested.

An audit is not always required. It’s generally performed because your investors, your bank, or certain regulators require it. Talk to your legal counsel and the rest of your team to determine whether an audit is necessary.

Financial and Investor Reporting (Fund Administration). This involves day-to-day bookkeeping and ongoing financial and investor reporting. To the extent you have a fund, a fund administration team can perform investor-level calculations and waterfalls in order to send your investors regular capital statements and updates. They help manage your investor portal, get distributions out the door, and track your investments. Although these services can be done in-house, the majority of lenders opt to outsource to experts to reduce the burden of building out an internal team and the costs that come with doing so.

The primary advantages of outsourcing are the industry knowledge and dedicated teams that come with it. Further, financial statement reporting will become increasingly important because of the recent Securities and Exchange Commission vote to adopt more stringent quarterly reporting requirements to investors. You should work with your legal counsel and CPAs to determine whether you have enhanced reporting requirements.

As you talk to CPA firms, keep in mind that some firms provide only one of these services (e.g., only fund administration or only tax compliance) and others provide multiple. Most CPA firms are accustomed to collaborating and working with other CPA firms (and may even have referrals for firms they enjoy working with and think would suit your needs best).

The one exception is auditor independence. Auditor independence regulations require that auditors remain independent of the companies they audit. Specifically, per the SEC “an auditor’s independence is impaired if the auditor is not, or a reasonable investor with knowledge of all the facts and circumstances would conclude that the auditor is not, capable of exercising objective and impartial judgement on all issues encompassed within the audit engagement.”

This regulation limits the work outside of audit services a CPA can perform for their audit clients (including bookkeeping, certain management functions, and valuation services). One exemption generally applied is for tax services. It is common, therefore, to have your audit firm handle tax prep and compliance, but it is not allowed to also perform your bookkeeping or fund administration.

Industry Expertise and Reputation

Once you start reaching out to CPA firms, it is crucial to understand the extent to which they are experts in the spaces you need.

Private Lending. You should consider the experience a firm has in the private lending space, especially in the specific types of deals you’re doing. Ask industry-specific questions upfront to get a sense of their familiarity with your business and types of transactions. Also ask whether they have other clients that do what you do and how experienced their team members are in the space. Just because they can talk fluently about your business doesn’t always mean the entire firm has experience in the space.

If you are a direct lender, it’s hard to overemphasize the importance of working with service providers that are lending experts. They need to be familiar with your deal documents, loan servicer reports, etc. to properly do the job. Given the growth of the private debt and direct lending space over the last 10 years, a lot of service providers are trying to break into the market. Make sure you pick a team that knows your business as well as you do.

Private Funds/REITs/Structure. If you are launching a fund, REIT, or a combination of the two, you’ll want CPA firms that specialize in these structures. It’s common for a lender to use a longtime in-house tax preparer or bookkeeper who knows the lending business well but quickly gets “over their skis” when a fund or a REIT is launched. You can ask probing questions about REIT compliance and testing, or fund economics and waterfalls, to get a sense of their knowledge.

Additional Considerations

Besides the previous factors, consider others that may be important to you in selecting a CPA firm, including pricing, knowledge, and reputation. All three are related. Knowledge comes with a price tag, but if it limits your risk of litigation or non-compliance, investing in experienced professionals can actually save you money.

Also ensure that the CPA firm you select can meet your needs now as well as in the future. The time and expense involved in changing firms can be significant and disruptive.

The private lending world is becoming increasingly complex and regulated. Managers must consider the qualifications of the professionals they will work with to ensure managerial and financial statement compliance requirements are met. As with all things, the right due diligence now will pay dividends later.