Trust and Delegation

[EIA]

Hi David,

Explain how past regulatory and legal problems with hedge fund reporting relates to expected future operational events.
2012 FRM Risk & Investment Management 8.e Brown, Trust & Delegation

•We find that funds with legal and regulatory problems have poor operational controls.
–Problem funds are less likely to have independent pricing.
–Problem funds are more likely to have switched vendors in the last three years. (…changing vendors may be a red flag as the fund may have been dropped by the vendor due to data inconsistency.)
–Finally, problem funds are less likely to have a major auditor. We would expect that reputational concerns would lead major auditors to be

The highlighted sentence is not complete. What is the completed sentence?

BR

EIA

 

[David Harper CFA FRM]

Hi BR,

Sorry (I wish my only errors were such fragments, how sweet would that be!). Should be "... lead major auditors to be reluctant to accept such funds as clients."

From the reading:

We find that funds with past problems have poorer operational controls. Problem funds are less likely to have independent pricing. Problem funds are also more likely to have switched vendors in the last three years. While changing vendors to upgrade service quality is positive for investors, changing vendors may also be a red flag, since the fund may have been dropped by the previous vendor due to data inconsistency. Finally, problem funds are less likely to have a major auditor. Reputational concerns may lead major auditors to be reluctant to accept funds with legal or regulatory issues as clients. This evidence is consistent with Brown et al. (2008b), who find that operational risk (measured by the probability of having problems) is positively associated with conflict of interest and concentrated ownership. We would expect that having a major auditor and independent pricing would be negatively associated with conflicts of interest.

 

[RiskNoob]

Other than one incomplete sentence from the above, David did a great job summarizing the lengthy article into two pages while capturing all points from the AIM... :

RiskNoob