Global accounting firms believe that the proposed agreed upon procedures report from an independent accounting firm that would be required for a sponsor using a representative sample as a method to retain risk in securitized assets is inappropriate and would not achieve the regulatory objectives of Section 941 of Dodd-Frank. For asset-backed securities subject to risk retention requirements, the risk retention regulation proposed by the SEC and the banking agencies provides sponsors with the ability to choose among several options for retaining the required risk, including the retention of a representative sample of the assets designated for securitization in an amount equal to at least 5 percent of the unpaid principal balance of all the designated assets. The agreed upon procedures report would comment on whether the sponsor has the necessary policies and procedures to ensure that it complies with the requirements for constructing and maintaining the representative sample.
In a comment letter, PricewaterhouseCoopers said that the scope of the agreed upon procedures engagement would be limited to performing specified procedures designed to address whether the sponsor has established the minimum policies and procedures described in the regulation. In PwC’s view, an agreed upon procedures engagement for which the scope is limited solely to performing specified procedures designed to address whether the minimum policies and procedures have been established, versus applied in constructing the representative sample, would not meet the objective of ensuring that the retained assets have the same credit risk as investors in a securitization.
Similarly, Ernst & Young, in its comment letter, doubted that the agreed upon procedures could be used to achieve the regulatory objectives. The basic premise of an agreed upon procedures engagement is that one or more parties agree in advance to the sufficiency of the procedures for their purposes, noted E&Y, and the resultant report is restricted to use by only those specified parties. Any reference to the report to other parties would be inappropriate, said E&Y, because such users would not have agreed, in advance, to the sufficiency of the procedures and would not have the report to evaluate the results.
This is suggested by the proposal, which would require the sponsor to tell investors or potential investors that the agreed upon procedure report had been obtained as required by the proposal. However, pursuant to professional standards on AUP engagements, the investors or potential investors would not be parties to the report and would not be entitled to access it or rely on it for any purpose since they would not be specified parties.
In its comments, KPMG was also concerned that an agreed upon procedures report from an independent accounting firm may not achieve the stated objective. Also, they would not be general use reports available to investors because investors are not specified parties.
PwC noted that the proposal would also require the sponsor to disclose a description of the policies and procedures used for ensuring that the process for identifying the representative sample has equivalent material characteristics to those of the pool of securitized assets. If the policies and procedures are disclosed, then the performance of an agreed upon procedures engagement designed to address whether the sponsor has established policies and procedures seems unnecessary.
More broadly, E&Y is not convinced that the involvement of an independent public accounting firm is necessary in these circumstances. While the integrity of the representative sample could be verified at the outset by some form of examination, the proposed post-securitization periodic reporting appears to provide sufficient transparency to serve the needs of investors by providing performance results of the sponsor’s retained risk pool compared to the performance of the asset-backed securities securitization. As such, the firm recommended that the representative sample approach not require any involvement of an independent public accounting firm.
But if an accounting firm is used, continued E&Y, the most appropriate way to involve an independent accounting firm in providing assurances about the adequacy of the representative sample would be to construct an examination-level attest engagement around a set of criteria developed to meet the needs of investors and other report users. This would provide assurance to investors as to whether appropriate policies and procedures have been implemented and the related controls are operating effectively. However, E&Y cautioned that such an approach would be resource intensive for all parties involved and could delay related asset-backed securities transactions. Thus, a cost-benefit analysis for this alternative would need to be performed.
Similarly, PwC noted that an independent accounting firm could perform an attestation examination engagement to evaluate whether the retained assets were representative of the pool assets for a specific securitization transaction based on the policies and procedures used by the sponsor to construct the representative sample. Similar to an agreed upon procedures engagement, the subject matter would need to be subject to reasonably consistent measurement, and therefore the description of the minimum policies and procedures in the proposed rules may have to be more specific to evaluate whether the criteria are suitable as required by professional standards. In contrast to an agreed upon procedures engagement, use of a report on an examination engagement is not limited as long as the sponsor-specific policies used to construct the representative sample are publically available.