Getting Your RIA's Books Ready for an SEC Exam: An Accounting & Finance Readiness Guide
- Alex Roe
- 3 days ago
- 6 min read
Getting Your RIA's Books Ready for an SEC Exam: A Finance Function Readiness Guide
Most RIA principals think about SEC examinations as a compliance event. The CCO runs the prep, the policies and procedures binder gets refreshed, and the firm braces for questions about advertising, custody, and Code of Ethics enforcement.
What surprises a lot of advisers—especially during their first exam after crossing a billion-dollar AUM threshold—is how quickly the examiner's questions turn to the books.
Books and records aren't a side topic. Under Rule 204-2 of the Investment Advisers Act, they're the foundation the rest of the examination is built on. Examiners use the financial records to verify what the firm says it's doing, to test whether fees are calculated and disclosed correctly, to assess solvency and continuity risk, and increasingly to spot patterns that suggest something else worth looking at.
If your finance function isn't built for that level of scrutiny, an exam becomes a multi-week fire drill. If it is, the exam becomes a routine review.
This guide walks through what examiners actually request from finance, where RIAs most often fall short, and what a "ready" finance function looks like in practice.
What the SEC actually requests from finance
The initial document request letter (DRL) that arrives at the start of an exam is more granular than most firms expect. From the finance function specifically, examiners typically ask for:
General ledger and trial balance.
Usually for the prior 24 months at minimum, sometimes longer. They expect a clean GL with consistent account naming, no plug entries, and a clear audit trail from journal entry to source document.
Detailed revenue records.
Advisory fee billing reports tied to AUM calculations and the underlying custodian data, broken out by client, billing period, and fee schedule. Examiners reconcile these against the firm's Form ADV disclosures and the advisory agreements on file.
Expense detail and supporting documentation.
Vendor invoices, expense reports, soft-dollar arrangements, and any expense that could implicate a fiduciary issue (research services paid with client commissions, marketing reimbursements, education expenses, gifts and entertainment).
Partner / member accounts.
Capital accounts by partner, distributions, guaranteed payments, owner expense reimbursements, and the methodology for allocating profit. This area is where a lot of firms get caught flat-footed.
Bank and custodian reconciliations.
Monthly reconciliations of operating accounts and any accounts that touch client assets, with documentation of who prepared, who reviewed, and when.
Financial statements and supporting schedules.
Internal P&L and balance sheet for the exam period, plus the schedules that roll up to the headline numbers—AR aging, deferred revenue if any, accrued compensation, prepaid expenses, and intercompany if there are related entities.
Net capital / financial condition data.
For most state-registered advisers and certain SEC-registered firms, evidence of financial responsibility and any required net worth or capital calculations.
The DRL itself is usually 30 to 80 line items long. Finance owns perhaps a third of them outright and is the supporting cast for another third.
Where RIA finance functions usually fall short
Most of what goes wrong in an exam isn't a question of intent. It's a question of finance infrastructure that grew up around a smaller firm and didn't get upgraded as AUM grew. A few patterns show up over and over.
The chart of accounts hasn't kept pace with the firm.
Advisory fees, financial planning fees, insurance commissions, and any solutions revenue all flow through a single "Revenue" line. Examiner asks for revenue by service line and the answer takes two weeks instead of two hours.
Partner accounting is informal.
Capital accounts are tracked in a spreadsheet maintained by one person, profit allocations are calculated retroactively at year-end, and owner draws are commingled with reimbursable expenses. None of this is illegal, but it makes the examiner work harder to see whether the firm's economics match its disclosures — which is never a good outcome.
Soft-dollar and expense classification is loose.
Research, technology, and conference expenses get coded inconsistently. When the examiner asks for a list of all soft-dollar uses or all expenses paid with client commission credits, the answer requires manual review of hundreds of line items.
The close happens late, sometimes very late.
Books are closed 30 to 45 days after month-end, reconciliations are batched at quarter-end, and the most recent reliable financial statement is from two quarters ago. An examiner asking "show me your most recent monthly financials" exposes the lag.
Documentation lives in people, not systems.
Why a particular expense was coded a certain way, why an accrual was recorded, why an intercompany allocation method was chosen — the answers exist in someone's head, not in a memo or a policy. When that person isn't in the room, the answers stop being available.
There is no clear separation of duties.
The same person who enters bills also approves them. The same person who reconciles the bank account also moves money. The firm is small enough that this feels practical, and it usually is—until an examiner notes the lack of compensating controls.
None of these issues are catastrophic individually. The problem is they compound. A firm with three of them spends the exam on the defensive; a firm with all six ends up with deficiency letters that take six months to resolve.
What a ready finance function looks like
The good news: the work required to be exam-ready is the same work required to be M&A-ready, board-ready, and PE-ready. None of it is wasted. A finance function built to these standards is also better positioned for partner succession, capital raises, and any future strategic event.
GAAP-aligned monthly close, finished by the 15th.
Not 30 days. Not 45. A close cadence that lets you give an examiner a "current" picture rather than a stale one, and that lets you run the firm on real numbers instead of approximations.
Chart of accounts that mirrors how you actually make money.
Revenue split by advisory fees, planning fees, and any other revenue type. Expenses split in ways that let you answer fiduciary questions instantly: research, technology, marketing, travel and entertainment, owner versus firm expenses, soft-dollar versus hard-dollar. Department or office tagging if you have multiple advisor teams.
Disciplined partner accounting.
A formal capital account schedule maintained monthly, profit allocation documented in advance, distributions categorized correctly, and a clear separation between firm expenses, owner reimbursable expenses, and partner draws. Year-end isn't the first time the math gets done.
Reconciliations on a calendar, not on demand.
Bank, credit card, custodian fee batches, and any clearing accounts reconciled monthly with a sign-off trail. Reconciliation packages prepared in a format that can be handed to an examiner without modification.
Documented accounting policies.
A smart, comprehensive 8 to 15 page document covering revenue recognition, expense classification, capitalization thresholds, intercompany methodology, and any judgment areas. The policy memo is what protects the firm when an examiner asks why something was treated a certain way.
Compensating controls for a small finance team.
If one person enters and approves, the principal countersigns above a threshold. If one person reconciles and disburses, the bank statement gets reviewed independently. The controls don't have to be elaborate—they have to exist and be documented.
A clean fee-billing reconciliation.
Quarterly advisory fees calculated, reviewed against the advisory agreements, tied back to the custodian data, and reconciled to the revenue posted in the GL. Any billing exceptions documented and remediated.
Audit-ready document storage.
Vendor invoices, expense reports, executed agreements, and bank statements stored in a structured system organized by year and category, retrievable in minutes rather than days.
The strategic case for getting this right now
The compliance argument for exam readiness is real, but it's also the smaller argument. The bigger one is that an RIA built to institutional finance standards is worth meaningfully more than one that isn't—and the gap widens as the firm scales.
Private equity buyers and strategic acquirers run quality-of-earnings work that asks essentially the same questions an examiner asks, just with more focus on margin and recurring revenue. A clean GL, disciplined partner accounting, and accurate service-line revenue split aren't compliance hygiene at that point—they're the difference between a multiple at the top of the range and a multiple at the bottom.
Banks lending against the firm look at the same data with the same eye. So do the next generation of partners considering buy-in. So does an internal valuation for estate or succession planning purposes.
In other words, the work an RIA does to be ready for the SEC turns out to be the same work that maximizes optionality for everything else worth caring about.
What to do this quarter
If your last close took more than three weeks, your chart of accounts hasn't been updated since you launched, or your partner capital accounts are maintained in a single spreadsheet, your finance function isn't yet ready for a meaningful exam.
A few practical starting moves:
1. Pull a recent month's close and time how long it actually took. If you can't, that's the first finding.
2. Run a sample DRL exercise: pick five line items off a public SEC document request letter and try to produce the underlying records in 48 hours.
3. Get an outside read on your chart of accounts — a fresh set of eyes typically finds three to five structural issues in an hour.
4. Map your partner accounting against the standards above. Most RIAs find at least one gap; the question is how big.
Once you know where the gaps are, the work to close them is finite. Most RIAs can move from "fire drill" to "routine review" inside two quarters with the right finance function in place.
Vaerifi designs, implements, and operates financial infrastructure for growing RIAs—built to support SEC examination, M&A diligence, and long-term strategic flexibility.
Learn more about accounting for RIAs at Vaerifi.com/accounting-for-rias
Or schedule a call to learn more.
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