The proposed amendments would require that all registered investment advisers with custody of client assets engage an independent public accountant to conduct an annual surprise examination of client assets. This is significant change from the current Custody Rule...This actually seems to be a better solution than relying on the SEC to do the audits. The big audit firms stand to make some good money on this, but it's the sort of thing that would have prevented the major fraud cases.
In addition the independent public accountant would submit the results of the suprise audit to the SEC:
Under the proposed amendments, the independent public accountant conducting the surprise examination would be required to notify the SEC within one business day of finding a “material discrepancy” (a term not defined in the proposed rule), and to submit a Form ADV-E to the SEC, electronically, accompanied by a certificate within 120 days after commencement of the surprise examination.For those investment managers already registered with the SEC, this wouldn't be a major change, though the costs will definitely go up. The SEC estimates that over 9,500 registered advisers would pay an average of $8,100 in accounting fees. For those who are not yet registered, get your wallets out; this is going to get expensive.
Smaller accounting firms may try to get into the surprise audit business even if they are not the fund's primary auditor by offering a lower cost solution. The overall approach from the SEC's perspective may be quite effective.