Investment Company & Asset Management Audit UAE 2025: SCA, DFSA & Fund Accounting

Investment companies and asset managers in UAE face unique audit challenges stemming from complex fair value measurements, NAV calculations, performance fee structures, and dual regulatory oversight from Securities and Commodities Authority (SCA) and Dubai Financial Services Authority (DFSA).

Understanding Investment Company Structure

UAE investment landscape includes:

Mutual Funds: Pooled investment vehicles open to public investors (SCA regulated)

Private Equity Funds: Closed-end funds investing in private companies (DFSA/SCA regulated)

Hedge Funds: Alternative investment funds using diverse strategies (typically DFSA regulated in DIFC)

Asset Management Companies: Manage client portfolios on discretionary/advisory basis

Family Offices: Manage single family wealth (increasing in DIFC/ADGM)

Net Asset Value (NAV) Calculation & Audit

NAV Formula

NAV = (Total Assets - Total Liabilities) / Outstanding Units

Example: Fund has AED 100M assets, AED 5M liabilities, 10M units outstanding = NAV AED 9.50 per unit

Audit Procedures for NAV

Asset Valuation Verification: Auditors verify fair value of each investment:

• Listed securities: Confirm to exchange closing prices
• Unlisted securities: Review valuation models, assess assumptions
• Alternative investments: Obtain independent valuations

Liability Verification: Confirm all liabilities recorded:

• Management fees payable
• Performance fees accrued
• Administrative expenses

Unit Count Accuracy: Verify outstanding units reconcile to subscription/redemption register

Mathematical Accuracy: Recalculate NAV and verify published NAV accurate

Fair Value Measurement Audit

IFRS 13 Fair Value Hierarchy

Level 1: Quoted prices in active markets (easiest to audit - verify to exchange data)

Level 2: Observable inputs other than quoted prices (interest rates, yield curves - auditors verify sources)

Level 3: Unobservable inputs (private company valuations - most audit effort required)

Auditing Level 3 Valuations

Valuation Methodology Review: Assess appropriateness of DCF, comparable company, or other methods

Assumption Testing: Challenge key assumptions:

• Revenue growth rates
• EBITDA margins
• Discount rates (WACC)
• Terminal value multiples

Independent Valuation Specialist: For material Level 3 investments, auditors engage valuation specialists

Sensitivity Analysis: Assess impact of assumption changes on valuation

Management Bias Assessment: Determine if valuations consistently aggressive or conservative

Performance Fee Accounting & Audit

Performance Fee Structures

High Water Mark: Manager only earns fees when NAV exceeds previous high (protects investors from paying fees twice on recovery)

Hurdle Rate: Manager earns fees only when returns exceed minimum threshold (e.g., 8% annually)

Typical Structure: 2% management fee + 20% performance fee above hurdle

Accounting Complexity

Performance fees often accrued quarterly but only crystallize annually:

Accrual: Dr. Performance Fee Expense Cr. Performance Fee Payable

Reversal if underperformance occurs: Previous accruals must be reversed if fund subsequently underperforms

Audit Verification

Fee Calculation Testing: Recalculate performance fees based on:

• Correct NAV movement
• Proper high water mark application
• Accurate hurdle rate calculation

Crystallization Events: Verify fees only paid when crystallization conditions met

Clawback Provisions: Some agreements require manager to return fees if subsequent losses - auditors assess liability

SCA Regulatory Compliance Audit

SCA Requirements for Investment Funds

Minimum Capital: Varies by fund type (typically AED 2-10 million)

Fund Administrator: Independent administrator required for NAV calculation and unit registry

Custodian: Independent custodian must hold fund assets

Periodic Reporting: Quarterly and annual financial statements to SCA

Investment Restrictions: Limits on single issuer concentration, derivatives usage, leverage

Auditor's SCA Reporting

Auditors must report to SCA on:

• Compliance with investment restrictions
• Proper NAV calculation
• Custodian confirmation of assets
• Any regulatory breaches identified

DFSA Compliance (DIFC Funds)

DFSA Regulatory Framework

DIFC-based funds and asset managers fall under DFSA jurisdiction with distinct requirements:

Qualified Investor Funds: For professional/sophisticated investors only

Public Funds: Retail investor access (higher regulatory standards)

Exempt Funds: Limited exemptions for specific structures

DFSA Reporting Requirements

Audited Financial Statements: Annual audited financials to DFSA

Compliance Officer Report: Annual compliance report from designated officer

Risk Management: Documented risk management framework

Valuation Policy: Board-approved valuation policy for all asset classes

Fund Accounting Audit

Unique Accounting Aspects

Subscription Accounting: New investor capital: Dr. Cash Cr. Unit Capital (at NAV on subscription date)

Redemption Accounting: Investor exits: Dr. Unit Capital (at NAV on redemption date) Cr. Cash

Dealing Day Reconciliation: Verify all subscriptions/redemptions processed at correct NAV

Dividend Distributions: If distributing fund, verify distributions calculated correctly per fund rules

Income Recognition

Interest Income: Accrued daily for bonds

Dividend Income: Recognized on ex-dividend date

Realized Gains: On investment sales

Unrealized Gains: Mark-to-market revaluation at period end

Master-Feeder Fund Structures

Structure Overview

Master Fund: Holds all investments (typically offshore for tax efficiency)

Feeder Funds: Multiple feeders invest into master (e.g., USD feeder, EUR feeder, AED feeder)

Audit Complexity

Consolidation: Feeder NAV derives entirely from master fund investment

Cross-Border: Master often in Cayman/Luxembourg, feeders in UAE

Look-Through Reporting: Investors need consolidated view of underlying investments

Auditor Coordination: Feeder auditor relies on master fund auditor's work

Common Investment Fund Audit Findings

Stale Prices: Using outdated prices for illiquid securities instead of current fair value

Performance Fee Overaccrual: Accruing fees before crystallization conditions met, not reversing when required

Investment Restriction Breaches: Exceeding single-issuer limits or prohibited investments

Incomplete Disclosure: Inadequate risk disclosure, valuation methodology, or related party transactions

Custody Confirmation Gaps: Not obtaining independent confirmation from custodian

Preparing for Investment Company Audit

Required Documentation

Investment Portfolio: Detailed listing of all holdings with cost, fair value, unrealized gains/losses

NAV Calculations: Daily/weekly NAV calculations with supporting workpapers

Subscription/Redemption Register: All investor transactions with dates and NAV applied

Performance Fee Calculations: Detailed workings for any performance fees

Custody Confirmations: Independent confirmation from custodian of all holdings

Valuation Reports: Independent valuations for Level 3 assets

Management Agreements: Investment management agreement, fund prospectus, offering memorandum

Regulatory Filings: All SCA/DFSA submissions during year

Board Minutes: Investment committee and board meeting minutes

Frequently Asked Questions

What are SCA reporting requirements for investment companies?

The Securities and Commodities Authority (SCA) requires licensed investment managers to submit quarterly portfolio reports, annual audited financial statements, and maintain specific capital adequacy ratios and compliance certifications.

How is fair value determined for illiquid investments?

Fair value for illiquid investments typically uses valuation techniques including discounted cash flow analysis, comparable transaction multiples, or independent third-party valuations, with robust documentation of assumptions and methodologies.

Conclusion

Investment company and asset management audits demand specialized expertise in fair value measurement, complex fee calculations, NAV determination, and SCA/DFSA regulatory compliance. The combination of subjective valuations, sophisticated fee structures, and rigorous regulatory oversight makes these among the most technical audits in UAE financial services.

As Ministry-approved auditors with extensive experience auditing mutual funds, private equity funds, hedge funds, and asset managers across SCA and DFSA jurisdictions, Farahat & Co provides comprehensive investment fund audit services ensuring accurate NAV reporting, proper performance fee accounting, and full regulatory compliance.