Many private fund advisers rely on the so-called “audit exception” to the surprise annual examination requirement under Rule 206(4)‑2 under the Investment Advisers Act of 1940, commonly known as the “custody rule.” To qualify for the exception, a fund’s financial statements must be audited at least annually in accordance with generally accepted accounting principles by an independent auditor. In a recently filed enforcement proceeding, the SEC alleged that an audit firm and two of its partners engaged in improper professional conduct when auditing several of an investment adviser’s private funds by repeatedly failing to satisfy applicable auditing standards when auditing funds that held “Level 3” assets and failing to satisfy the independence requirement. This article discusses the SEC’s allegations, which illustrate the many challenges associated with valuation of illiquid assets, as well as the agency’s expectations of auditors. See “SEC Continues to Emphasize Strict Compliance With Custody Rule” (Oct. 1, 2020); and “Advisers Must Ensure Their Auditors Are Appropriately Competent and Capable” (Mar. 26, 2020).