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FRM Part II · FRM Exam Part II · Performing Due Diligence on Specific Managers and Funds

Which practice is most effective for an investor performing operational due diligence to detect potential fraud at a manager?

The most effective practice is independently verifying assets and key facts directly with third-party service providers and running background checks on principals. Self-reported questionnaires, prior-year audits alone or performance rankings cannot confirm that assets exist or that controls work, so independent corroboration is essential.

  1. ARelying solely on the manager's signed due diligence questionnaire
  2. BReviewing only the audited financial statements from the prior year
  3. CIndependently verifying existence of assets and key facts through direct contact with third-party service providers and background checks on principalsCorrect
  4. DFocusing exclusively on past performance rankings

Explanation

Fraud is best detected by independent corroboration, such as confirming assets with custodians, administrators and auditors and running background checks. Questionnaires and audited statements can be false or insufficient, and performance rankings say nothing about controls.

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