Third-Party Certification—Knowing Your Options, Learning the Lingo

lingo-seriesIn our previous blog, Self-Certification: Buyers and Sellers Beware, I discussed issues surrounding a “self-certification” of compliance with ALTA’s Best Practices, and how that approach could be utilized to comply with some lenders’ requests to demonstrate proof of adoption of the Best Practices standards.  A review of recent lender correspondence requiring some level of compliance indicates that self-certification is an option for some lenders; however, there are a number of lenders who have expressly stated that self-certification is not acceptable. Those lenders require the use of an “independent third party” to conduct an assessment of your operations and provide a report of your compliance.

Today, this blog will dig into some of the options that independent third parties may offer, and expose you to some terminology that title and settlement agents will likely hear and need to understand.

First of all, when the term independent third party is used by a lender, it may be intended to allow you to use either a CPA or a non-CPA firm.  (However, because CPAs are required to adhere to a set of professional standards as established by the American Institute of Certified Public Accountants [AICPA] when conducting their assessment of your operations, many lenders prefer reports prepared by CPAs.)  It is best to check whether they desire a CPA firm to conduct the assessment, or whether CPAs are preferred, but not required. You should make this inquiry of the lender, lest you find you have hired the services of a non-CPA firm, and your investment in its services is deemed worthless by that particular lender.

Next, if you decide to hire a CPA firm to conduct your assessment, it is best to familiarize yourself with another set of specific terms that you will soon encounter.  Understanding the “lingo” used by CPAs is essential to ensuring you correctly ask for what you want and get what you are asking to receive.  The balance of this blog will focus on the term “engagement” and how it is used in the CPA community.

Obviously, the term engagement in the Best Practices assessment context has nothing in common with that identical word used frequently in connection with marriages.  This is a word of art used by CPAs to define the scope of the work they intend to perform for you.

As a title professional, think of this term in the following scenario.  When a real estate client comes into your office and asks you to “handle the purchase of a property they are buying,” in their mind, they are asking you to utilize the breadth of your knowledge to facilitate the purchase as defined in the purchase and sale agreement.  But before they leave your office, you need to ask a few questions to more closely pinpoint exactly what duties you are being asked to perform.  You may ask, “Do you want me to search the title, carefully review the restrictions, prepare the deeds, sit with you at the closing, and negotiate better terms in your title insurance policy? Or, am I being hired to merely look over the closing statement to ensure you don’t get charged anything extra at the closing that someone else is conducting?”  Title professionals are often hired to only perform specific tasks involved in a real estate transaction.  The amount a client is asked to pay is directly related to the specific actions undertaken and your assessment of the risks associated with those tasks.  If you don’t clearly reach an understanding as to the scope of your work, you may find yourself blamed for an overcharge on the Closing Disclosure when all you were hired to do was search the title, or you may be asked to perform services that were not included in your quoted fees.

Just like title professionals, CPAs can perform a lot of different specific tasks for you.  In order to ensure they have a clear understanding of the scope of their employment; they also have to ask questions about the tasks you wish for them to perform.  This is where the term engagement is used by the CPA world.  Once you contact and discuss the project scope with a CPA, he or she will offer to provide you with an Engagement Letter.  The AICPA provides the following explanation of what this letter is and what it encompasses:

 An engagement letter is the contract between the client and accountant that defines scope of work (e.g., returns to be prepared) and the responsibilities and obligations of each of the respective parties; many include fee estimates or quotes and other language regarding ability to use and/or disclose tax information.

In short, in the title professional’s world, an engagement is identical to whatever you have agreed to perform for your real estate client.  Were you hired to solely accomplish the “review of the CD” or “search of the title” or “to search the title, secure title insurance, participate in the closing, and handle disbursement of loan payoff funds?”  Since CPAs will take the time and effort to carefully define what they understand they are being hired to perform, it is incumbent on you to carefully read, and understand, what they are telling you that they are willing to perform.  This is where the hard part begins for most title professionals.  Even though CPAs will clearly define the scope of work they are willing to perform, they describe the scope of their services using words that are clearly understood in the CPA community; but in my experience, confusion often arises because the specific terms utilized are not fully comprehended by title professionals.

Usually, a CPA engagement letter will utilize one of the following terms to describe what will be provided: “review,” “agreed upon procedures,” “certification,” “Certification Plus,” “examination,” “SOC 1,” or “SOC 2.”  Each of these terms is merely a shorthand reference to a very specific set of procedures and the professional standards under which they will be performed.  These shorthand phrases are well-known in the accounting industry and need no further explanation to others in that profession.  Unfortunately, most title professionals don’t share that insight into what each of these terms mean.  As such, without some further explanation, the engagement letter doesn’t do a good job of evidencing what both parties agree is being purchased and performed.

In our next blog, I will explore a “cheat sheet” that PYA has prepared and will provide the title professional with insight into what each of these cryptic accounting terms actually means within the context of a CPA Engagement Letter.  Since the cost between some of these services may vary as much as $5,000 to $10,000, taking some time to understand these terms can be a worthwhile endeavor.  With the use of this helpful chart, title professionals will be better prepared to ask for, and receive, the specific accounting services that best meet their needs.