In a previous blog, I covered the scenario in which a title professional contemplates the use of a CPA firm to assist in assessing compliance with ALTA Best Practices. Once the decision is made to do so, the CPA firm issues an “engagement letter” that states, in terms familiar to the accounting industry, what the firm is willing to do for a title professional’s operation. The letter most often will describe the specific services the accountant intends to perform, using terms such as: “review,” “agreed-upon procedures,” “certification,” “Certification Plus,” “examination,” “SOC 1,” or “SOC 2.” Unfortunately, the accounting profession’s meaning for those terms is foreign to most title professionals.
In an effort to bridge the gap between what a CPA intends to convey with these accounting terms and how the title professional should interpret them, PYA has developed a helpful infographic, “Defining ALTA Best Practices Approaches.” In order to ensure you get the most out of this tool, the remainder of this blog will provide guidance for interpreting the infographic and easily deciphering any familiar, but commonly misunderstood, terms in a CPA’s engagement letter.
If you haven’t already, we recommend you download the infographic as we walk you through it, so we might help you better digest the abundance of information packed into this “cheat sheet.”
The above image is intended to direct your attention to various parts of the chart.
Look first at the bottom of column #2. As you scroll upward from “self-certification,” the chart lists different types of “engagements” offered by a CPA. The arrow in column #1 is designed to represent the relative desirability or “confidence” that a lender may derive from each of these engagement types. Those listed toward the bottom of column #2 provide lenders with the lowest level of confidence that a title professional is in compliance with Best Practices. However, as you scroll upward in that column, notice that the check marks to the right of each engagement type are indicative of the increasing degree of scrutiny that an operation has undergone, affording lenders increasing degrees of confidence in the reports submitted as proof of compliance.
Column #3 is designed to provide insight into the relative costs of each engagement type identified in column #2. The actual cost of any engagement is dependent upon a number of factors, including orders closed, the number of physical locations, and the number of escrow accounts maintained. Assuming those factors are the same for each of the respective engagement types, the “$” symbols indicate the relative cost of each engagement type, i.e. a review is roughly half the cost of a certification.
The text in area #4 provides a description of specific tasks or actions that would be performed by a CPA when conducting an assessment under each indicated engagement type. Notice a series of check marks in the columns in area #5. Each check mark indicates that the referenced task or action in area #4 would be performed for the specified engagement type. Visually, this reflects that fewer tasks are performed for those engagement types listed at the bottom of the infographic, and increasingly more actions are required for those engagement types appearing higher in column #2.
Area #6 offers a brief description of each engagement type. This area notes significant aspects of each engagement which will assist a lender in developing the confidence that they may wish to associate with reports produced in accordance with each engagement type.
Finally, the chart references, or footnotes, beneath the infographic provide insight into which of the “AICPA Standards” are utilized with each engagement type. For title professionals, this may be more detail than necessary because all of the engagement types presented here (with the exception of self-certification) have been approved for use by CPAs. But the information contained in these footnotes is important for accounting professionals in clarifying which of the listed engagement types are performed in accordance with either of the two accounting standards authorized via informal guidance previously provided by the AICPA.
Now that you have a good familiarity with your engagement type cheat sheet, you are in a position to interpret what lenders are requiring and/or what a CPA firm is offering to perform. When reviewing a lender’s directives on Best Practices compliance, or a CPA’s engagement letters, be sure to carefully look for key words such as review, agreed- upon procedures, certification, Certification Plus, examination, SOC 1, or SOC 2. After you find them, use our infographic to help identify what is required by the lender or offered by the CPA.
In upcoming blogs, we will look more closely at some of the pros and cons of different types of engagements.