Title professionals regularly use the term “review,” but most often it is used as a verb. (e.g. “I am going to review the Closing Disclosure,” or “You always should carefully review the loan closing instructions.”) However, over the past year working inside a CPA firm, I have discovered that CPAs also routinely use that same word, but in many important cases, it is used as a noun. (e.g. “Our firm will conduct a review of your company’s policies and procedures,” or “Our firm was engaged to conduct a review of their policies and procedures.”)
For most people, the significance of the word “review” goes unnoticed. Most of us in the title industry who read those last sentences are left with the general impression that the CPA firm is going to “glance over” our policies and procedures. However, for those in the accounting industry who read those same sentences, the term review triggers an entirely different thought process. To a CPA, the use of that word is a shorthand phrase indicating (1) the exact set of procedures they will perform, (2) the specific set of accounting standards to be employed, (3) the prescribed wording that will be contained in any report letter that may be issued in the future, and (4) a price estimate of that engagement type.
As a preface to the balance of this blog topic, since I am a title attorney and not a CPA, it should be noted that this blog is not designed to teach title people about the nuances of accounting terminology. However, when you are engaging a CPA to perform a service that may cost thousands of dollars, it is incumbent upon you to have a basic understanding of what is needed from, and what is being offered by, the CPA. As a result, we need to get somewhat technical in our explanation of this term.
Before proceeding further, I wish that every time a CPA used this term as a noun, it would be capitalized, italicized, and in bold print to help the reader understand that this word is intended to refer to a specific accounting industry process, but that wish will probably remain unfulfilled. So, in the meantime, title people are just going to have to closely read their agreements and correspondence and ask pointed questions whenever they see that word provided by anyone in the accounting industry. However, in this blog, I will hereinafter capitalize the term Review when it is used as an accounting engagement type to ensure that this audience understands its context.
Once you have determined that the word Review is being used as a noun in the context of the accounting industry’s jargon, you must take a moment to consider what that means to you in order to determine what specific services a CPA firm intends to provide.
Looking at PYA’s infographic, “Defining ALTA Best Practices Approach,” which provides a high-level overview of various engagement types that CPAs can perform, you will note that an accounting Review is the lowest level of engagement that can be performed by a CPA. When the AICPA issued informal guidance to CPAs indicating that a Review could be used by a CPA to assess compliance with Best Practices, it provided the following insight into the scope of this assessment “…[R]eview procedures are generally limited to reading relevant policies and procedures, and making inquiries of appropriate company personnel.” This statement is consistent with information depicted in the infographic.
As such, a Review as defined by the AICPA would merely require a CPA to read a title agent’s policies and procedures manual and thereafter make inquiries with the title agency’s personnel. This inquiry could be conducted via questionnaire, telephone conversation, or both. There is no requirement for the CPA to travel to your office, verify the existence of specified security features, observe any specific file documentation, or conduct interviews with non-company employees who routinely handle NPI in the title agent’s possession.
Once you understand the extremely limited scope of this type of engagement, it becomes obvious that the fee a CPA charges for providing this type of service can be substantially less than other types of engagements, which require far more activity and inquiry by the CPA. Understanding that the numerous types of engagements listed on the infographic require varying amounts of work and liability for the CPA will help you understand why there are discrepancies in the costs for the different types of engagements. Let’s put this in a closing agency context. You may normally charge $500 for a “closing,” with the assumption that the buyer and seller will be coming to your office and closing on your schedule inside normal business hours. However, if you were engaged to conduct the closing of a $75-million commercial transaction in which you had to travel to New York and sit at a conference room closing table for a period of three 10-hour days, the fee you would charge for “closing” would be substantially higher than $500. Your office, and a CPA’s office, both charge fees that are commensurate with the amount of work, time, and risk you each assume to complete the required engagement. The lesson to be learned is that you can’t base your decision to select a CPA solely upon what he or she will charge unless you have a thorough understanding of the scope of services being performed.
In addition to understanding the limited scope of this type of inquiry, and commensurate lower fee associated with reduced scope, you also should be aware that the final CPA report that will be issued will not result in a “Certification Package v 2.0” as recommended by ALTA. The independent third-party Certification form contained in the ALTA certification package was designed by ALTA, not AICPA. Since a Review is governed by accounting standards, AICPA defines the language that CPAs must utilize when conducting an assessment under this engagement type.
The ALTA certification package envisions an independent third party engaged to assess your compliance with Best Practices and, if appropriate, to issue a “Certificate” that contains the following language:
[The CPA Firm] performed the assessment procedures enumerated in the ALTA Best Practices Framework: Assessment Procedures dated July 19, 2013, (“Procedures”)…
After indication that:
Procedures executed related to [each of the 7 pillars]…
The ALTA form concludes that:
Our performance of such Procedures rendered a resulting grade of: PASS.
The AICPA dictates that a CPA firm engaged to perform a Review must utilize substantially different language if the assessment was satisfactorily completed:
We have reviewed XYZ Company’s (Company) title insurance and settlement practices and the Company’s responses in the accompanying Assessment Procedures portion of the American Land Title Association (ALTA) Best Practices Framework as of July 15, 20XX. Based on our review, nothing came to our attention that caused us to believe that the Company’s title insurance and settlement practices, as of July 15, 20XX, did not comply, in all material respects, with ALTA Best Practices based on the ALTA criteria.
The AICPA standards governing the Review engagement would not permit a CPA to issue a “Pass” report similar to the ALTA Certificate form, or utilize the language as drafted by ALTA. Furthermore, you now recognize that the scope of a Review did not involve an in-office inspection, substantive evaluation of any physical files, or interviews with nonemployees handling NPI. With that understanding, the language “… nothing came to our attention that caused us to believe that the company’s title insurance and settlement practices… did not comply…” provides a lower level of assurance. For this reason, the infographic designates a Review as providing a low level of confidence to lenders relying upon this type of report.
I do not want to infer that a title agent should never consider the Review engagement to assess his or her compliance with Best Practices. It may be an acceptable solution for your operation. I merely want to acquaint title agents with the fact that, although such engagements may be less expensive, they involve a significantly lower scope of inquiry, and in the end, will not result in a “Pass” Certification report as envisioned by ALTA. These factors may impact whether this accounting engagement type is an acceptable response to a lender’s request for proof of your compliance with Best Practices.
In an upcoming blog, I will discuss some other engagement types.