Wednesday, December 9, 2009
Significant cash flows ... so easy to get wrong
I'm at an outsourcing client who has a client who NETS cash flows during the month to determine if the account should be removed. NETS cash flows? And why do they do this??? Hopefully we'll find out, but let's think about this.
Their level to remove the account is >25% of the beginning market value. And so, we start with $1 million. On August 3 a $300,000 contribution is made. Then, on August 24, the account withdraws $250,000. Net = 300,000-250,000=5,000; 50,000/1,000,000 < 25%; therefore, don't remove the account. WHAT???
If the firm actually wishes to take advantage of the optional significant cash flow provision, they should have removed the account because of the August 3rd contribution (because presumably there's a bunch of cash they need to get invested). The fact that a few weeks later the client decided to withdraw funds has nothing to do with the earlier flow. In my opinion, they are confused!
Also, in my opinion: this is (a) wrong and (b) shouldn't be permitted by the firm's verifier.