AICPA Issues Interpretation Clarifying Application of Third-Party Due Diligence Report Rules to AUP Engagements

March 03, 2015

Industry participants have been waiting to see how the accounting profession would respond to the new third-party due diligence report rules, which become effective on June 15, 2015. The American Institute of Certified Public Accountants has now issued an interpretation relating to these rules, Agreed-Upon Procedures Engagements: Attest Engagements Interpretation of AT Section 201 (the “Interpretation”). The Interpretation removes several potential impediments to accounting firms’ compliance with the third-party due diligence report rules in connection with agreed-upon procedures engagements.

As described in our article on the topic, the new rules will require any issuer or underwriter of registered or unregistered ABS that are to be rated by a nationally recognized statistical rating organization to furnish a Form ABS-15G on EDGAR that describes the findings and conclusions of any third-party due diligence report obtained by the issuer or underwriter. The rules also will require providers of third-party due diligence services to deliver to each NRSRO producing a credit rating to which those due diligence services relate a certification on Form ABS Due Diligence-15E. This will be accomplished primarily by providing the certification to the issuer or underwriter for posting on its Rule 17g-5 website. For these purposes, “due diligence services” consist of a review of the pool assets for the purposes of making findings with respect to: the accuracy of the asset data; determining whether the assets conformed to stated underwriting standards; asset value; legal compliance by the originator; and any other factor material to the likelihood that the issuer will pay interest and principal as required. In the adopting release, the SEC acknowledged that the functions commonly performed by accountants in preparing their AUP letters are “due diligence services” because they involve reviewing the accuracy of information about the assets provided by the securitizer or originator.

According to the Interpretation, neither the publication by an NRSRO of an accounting firm’s required certification on Form ABS Due Diligence-15E nor the public EDGAR disclosure of the accounting firm’s findings and conclusions on Form ABS 15G is prohibited under AT section 201, “Agreed-Upon Procedures Engagements.” Distribution of that information is required by regulation to be made publicly available, and footnote 16 of AT section 101 specifically contemplates that the public availability of restricted-use reports may be mandated by regulatory agencies.

Form ABS Due Diligence-15E “contains certain language that is inconsistent with the language commonly used in AUP reports and could be misinterpreted…,” and “does not include all elements of an AUP report required by paragraph .31 of AT section 201.” Therefore, based on paragraph .67 of AT section 9101, “Attest Engagements: Attest Engagements Interpretations of Section 101,” an accountant should reword the prescribed form or attach a separate report that contains the required language.

The Interpretation also addresses an accountant’s ability to modify the illustrative AUP report language in paragraph .32 of AT section 201 to clarify the requirements and limitations of such engagements. According to the Interpretation, an accountant must disclose certain limitations of agreed-upon procedures, but because distribution to non-specified parties may cause them to misunderstand the use limitations. As contemplated by paragraph .79 of AT section 101 and paragraph .3l of A section 201, an accountant may modify the illustrative language to clarify that the information is not intended to be used by non-specified parties that may have access to it under the rules (e.g., NRSROs and investors).

Finally, because Form ABS Due Diligence-15E uses the term “review,” an accountant may add language clarifying that he or she did not conduct a review in accordance with AICPA attestation standards.