Corporate Compliance Audit for Private Equity Funds

Corporate Compliance Audit for Private Equity Funds

PE fund closed $75M acquisition of healthcare services company – 40 locations billing Medicare and Medicaid, $12M annual government contracts. LP investor call next week, LP attorney asking: “What compliance audit did you conduct post-acquisition?” Fund’s compliance team responds: “Standard operational due diligence covered it.” LP attorney shakes his head. “That’s not compliance audit – that’s business review.” Board member who survived a DOJ investigation speaks up: “PE funds get prosecuted now for portfolio company compliance failures.” Here’s what operational DD actually does – evaluates whether company makes money. Compliance audit does something different, determines whether company’s operations trigger DOJ prosecution. PE funds confusing the two acquire regulatory time bombs.

Thanks for visiting Spodek Law Group – a second-generation law firm managed by Todd Spodek, with over 40 years of combined experience including former FBI agents who investigated healthcare fraud, government contract fraud, and financial services violations. This article tells you why operational due diligence doesn’t identify regulatory violations, how PE funds face “should have known” liability for portfolio company compliance failures, and what industry-specific compliance audits uncover post-acquisition.

Operational DD vs. Compliance Audit

Operational due diligence and compliance audits serve fundamentally different missions. Operational DD evaluates business model – can this company make money? Timeline runs 30-60 days pre-close, DD team verifies financial projections and business operations, assesses management capabilities, reviews customer relationships and market position. Compliance audit evaluates regulatory violation risk – will operations trigger DOJ prosecution? Timeline runs 60-90 days post-acquisition, audit identifies regulatory violations and compliance gaps, tests internal controls against healthcare billing rules or government contract FAR/DFARS or financial services AML/BSA requirements.

Critical gap operational DD creates – the DD team sees $12M in government contracts as revenue stream. Compliance audit does something different, reviews whether those contracts comply with FAR cost allocation rules and time-charging requirements. Operational DD says “good revenue,” compliance audit says “criminal False Claims Act exposure.” Your DD team saw 40 healthcare locations generating $45M revenue, said “strong cash flow.” Compliance audit saw 40 locations billing Medicare without proper medical necessity documentation, said “DOJ healthcare fraud investigation waiting to happen.”

PE Fund Liability Doctrine – “Should Have Known”

PE funds with controlling interest face criminal prosecution for portfolio company violations under “should have known” standard. Here’s the prosecution theory DOJ uses – PE fund owns 51-100% of portfolio company, fund installed board members and appointed executives, fund receives detailed operational reporting, therefore fund should have conducted compliance audit detecting violations. When violations get discovered later, DOJ prosecutes fund for failing to audit what fund controlled. “Should have known” standard means fund faces prosecution even without actual knowledge, if reasonable compliance audit would have discovered violations, fund is liable.

Real-world scenario illustrates DOJ’s approach. PE fund acquires home healthcare company, conducts operational DD but no compliance audit, two years later DOJ investigates billing fraud. Fund managers argue “we didn’t know about the fraud.” DOJ response: “You controlled 80% ownership, installed the CFO, reviewed financial reports showing revenue spikes from $2M to $4M quarterly without corresponding patient volume increases. Reasonable compliance audit within 90 days would have detected fraudulent billing patterns, you’re liable for failing to audit what you controlled.” Controlling interest doctrine transforms business ownership into legal duty. Constitutional question emerges – can government prosecute fund managers for portfolio crimes they didn’t personally commit? DOJ’s answer stays consistent: Yes, when control combined with inadequate oversight equals willful blindness. You bought 75% of company billing Medicare, DOJ says that purchase came with duty to audit billing compliance.

Industry-Specific Compliance Requirements

Healthcare services compliance gets complex fast. Medical necessity documentation must support every billed service, coding accuracy determines whether company commits upcoding or unbundling, Anti-Kickback Statute governs physician referral arrangements prohibiting inducements, Stark Law prohibits physician self-referrals, billing system controls need testing. Operational DD reviews revenue per location and margins, looks at payor mix percentages. Compliance audit asks different question – was that revenue generated through legitimate billing or fraud? Home healthcare company billing $800 per visit when industry average is $450 shows two different stories. Operational DD sees “strong margins,” compliance audit sees “potential upcoding triggering HHS-OIG investigation risk.”

Government contractor regulatory framework shifts entirely when you look at what FAR and DFARS actually require. Direct versus indirect costs must follow Cost Accounting Standards allocation methodologies, labor hours charged to contracts must match actual work performed (time-charging accuracy matters), certain costs can’t be billed to government at all – entertainment, lobbying, certain legal fees fall in unallowable category. Truth in Negotiations Act requires cost and pricing data accuracy for contracts. Defense contractor billing IT support labor at $150/hour senior engineer rates while performing routine help desk work worth $50/hour tells two stories to different audiences. Your operational DD sees “strong margins on government contracts.” What does compliance audit see? Labor mischarging creating False Claims Act exposure potentially worth triple damages on overcharged amounts.

Financial services regulation operates through multiple layers that operational teams don’t evaluate. Bank Secrecy Act and AML program effectiveness depends on transaction monitoring actually detecting suspicious activity, suspicious activity reports must be timely and accurate, OFAC sanctions screening must catch customers on Specially Designated Nationals list. Fair lending compliance covers Reg B and ECOA anti-discrimination requirements, consumer protection spans UDAAP and Reg E and TILA compliance. Operational DD reviews loan portfolio quality and net interest margin, sees solid profitability numbers. Compliance audit digs deeper into actual AML program performance – does the system detect suspicious transactions requiring SAR filing? Fintech lender with 40% of transactions flagged by automated monitoring system as suspicious but zero SARs filed to FinCEN in past two years shows massive operational gap. Operational DD report says “efficient operations, low compliance costs,” compliance audit says something completely different – “willful BSA violations, criminal prosecution risk for entire AML program failure.”

DOJ 2025 Enforcement Targeting PE Funds

DOJ and SEC dramatically increased scrutiny of PE funds’ portfolio oversight in 2025. Alvarez & Marsal report from September 2025 warns of rising fraud risks in PE and VC portfolios, documents increased federal scrutiny of funds’ oversight responsibilities. Portfolio oversight now requires compliance auditing post-acquisition, operational due diligence pre-acquisition isn’t enough anymore. SEC 2025 examination priorities target PE fund compliance specifically – examining whether funds misrepresented portfolio company valuations to LPs by failing to disclose compliance risks, whether funds failed to disclose fraud or regulatory violation risks discovered during due diligence, whether funds breached fiduciary duties through inadequate due diligence that should have included compliance audits for regulated industries.

DOJ white-collar enforcement priorities announced May 2025 specifically target healthcare fraud and government procurement fraud for prosecution, PE funds with controlling interest in companies committing these violations now face prosecution. DOJ Corporate Enforcement Policy updated May 2025 clarifies guaranteed declination requires effective compliance program. For PE funds “effective compliance” means portfolio company oversight including post-acquisition compliance audits for regulated industries, no audit means no cooperation credit. DOJ no longer views PE funds as passive investors. Controlling interest equals active oversight duty equals compliance audit requirement. DOJ announced May 2025 priorities targeting healthcare fraud and government contract fraud – exact industries where PE funds acquire companies without compliance audits. September 2025 Alvarez & Marsal report warned PE funds face “increased federal scrutiny of oversight responsibilities.” Message from DOJ and SEC stays clear – conduct compliance audit post-acquisition or defend in federal prosecution why you acquired controlling interest without evaluating regulatory compliance.

What Compliance Audits Find Post-Acquisition

Compliance audits uncover violations operational DD teams never see because operational teams aren’t evaluating regulatory compliance. Common findings – policies exist on paper but aren’t implemented in practice, training conducted but employees don’t understand requirements, compliance officer lacks authority to stop violations. High-risk areas often aren’t monitored – healthcare companies miss medical necessity documentation reviews, government contractors skip time-charging audits, financial services firms don’t investigate suspicious transactions. Whistleblower complaints get suppressed or inadequately investigated.

Red flags compliance audits detect – revenue growth without operational changes indicates fraud, high compliance staff turnover happens when officers pressured to ignore violations, whistleblower complaints ignored or employees retaliated against, regulatory inquiries deflected without investigating conduct. Timing stays critical – post-acquisition compliance audit within 90 days establishes baseline before fund assumes full liability. Waiting six months means fund already liable for violations during that period.

Former FBI Agent Industry-Specific Expertise

Former FBI agents bring industry-specific regulatory investigation experience operational DD firms lack. Former FBI healthcare fraud agents investigated Medicare billing fraud for years, know exactly what documentation DOJ and HHS-OIG require, understand upcoding schemes from investigating them. They carry credibility with prosecutors who respect FBI findings, bring federal case experience corporate investigators never obtain. Former FBI government contract fraud agents investigated False Claims Act cases involving government contractors, understand FAR and DFARS cost accounting requirements from prosecuting violations, know what triggers DOD-IG and DCAA investigations.

Client value proposition works differently when fund presents compliance audit to DOJ during investigation – former FBI agent findings carry institutional weight internal audit team findings never earn. Prosecutors know former FBI agents understand what violations warrant prosecution. When DOJ investigates your healthcare portfolio company for Medicare fraud and asks “What compliance audit did fund conduct after acquisition?”, the answer needs substance. “Former FBI healthcare fraud agent with 12 years investigating Medicare billing fraud at FBI conducted 90-day compliance audit within three months of acquisition, identified medical necessity documentation deficiencies and billing pattern irregularities, fund implemented remediation program and self-disclosed to HHS-OIG before you started investigating.” That’s DOJ cooperation credit earning declination or 75% fine reduction. Compare that to answer earning zero cooperation credit: “We relied on operational due diligence conducted by business consulting firm.”

Question isn’t “Can we afford compliance audit?” Real question is “Can we afford DOJ prosecuting fund managers for portfolio company violations we didn’t audit?” Cost comparison tells different story than operational metrics. Operational due diligence costs $100K-$200K, evaluates business viability and revenue potential, doesn’t identify regulatory violations or compliance program weaknesses. Compliance audit costs $75K-$300K depending on portfolio company size and industry, identifies regulatory violations before DOJ discovers them, protects fund from “should have known” liability worth millions in fines and fund manager prosecution. Cost of no compliance audit runs higher – DOJ prosecution of fund managers under “should have known” standard, millions in False Claims Act penalties and fines, LP lawsuits against fund for breach of fiduciary duty by failing to conduct compliance audit on regulated industry acquisition, fund reputation destroyed.

Board facing post-acquisition compliance audit decision needs immediate action. If you closed healthcare services, government contractor, or regulated financial services acquisition within past 90 days – compliance audit must start immediately to establish baseline before fund assumes ongoing liability. Call us at 212-300-5196. If you acquired company billing Medicare or Medicaid, if you acquired defense or government services contractor, if you acquired regulated financial services company – former FBI agent compliance audit within 90 days protects fund from “should have known” prosecution. We’re available 24/7 because compliance audit timing determines whether fund has defense to DOJ charges. PE funds with controlling interest in regulated industries face DOJ prosecution for portfolio company violations they didn’t audit, 2025 enforcement environment means conduct industry-specific compliance audit post-acquisition within 90 days or defend in federal court why you acquired company without evaluating regulatory compliance that’s now costing fund managers their freedom.