Municipal Securities Offerings:
Auditor Involvement and Other
Key Considerations
A Governmental Audit Quality Center Web Event
October 15, 2013
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Administrative Notes
We encourage you to submit your technical
questions – please limit your questions to the
content of today’s program
You can submit your questions at any time during
this Web event by clicking on the “Q & A” tab on the
lower right-hand side of your screen
You can also download slides in PDF or PowerPoint
by clicking on “Handouts” tab
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Continuing Professional Education
There will be random participation pop-up markers
during the event
To obtain CPE, you must click “OK” on 75% of the
participation pop-up markers
If you are not receiving CPE for this event, ignore the
pop-up markers
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Continuing Professional Education
At the end of today’s presentation we will provide
steps for obtaining your CPE certificate
Contact the Service Center for help with obtaining
CPE at 888.777.7077 or service@aicpa.org
If you are not receiving CPE for this event, ignore
the pop-up markers if they appear.
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Presenters
Joel Black
Mauldin & Jenkins CPA’s
Dan O’Keefe
Moore Stephens Lovelace, P.A.
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Agenda
Setting the stage
Auditor involvement in bond offerings
•
•
•
•
•
•
“Triggers”
Voluntary association
Non-association
Comfort letters
Inclusion letters
Special financial reporting situations
Involvement with continuing disclosure documents
SEC developments
•
•
•
•
New players
Report to Congress on muni market regulation
Increased enforcement activity
Municipal advisor registration
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Glossary
OS
Official Statement – disclosure document prepared in connection with
initial sale of new securities. Also referred to as “primary market
disclosure.”
Continuing
disclosure
Disclosure documents issues subsequent to initial sale of securities
(throughout the life of the bond issue). Also referred to as “secondary
market disclosure.”
EMMA
MSRB’s Electronic Municipal Market Access system
EDGAR
SEC’s Electronic Data Gathering and Reporting system
MSRB
Municipal Securities Rulemaking Board
AAG-SLV
AICPA audit and accounting guide “State and Local Governments”
GAAS
Generally-accepted auditing standards
Rule 15c2-12
SEC rule, “Municipal Securities Disclosure”
Registered
offering
Offering of securities that is registered under the Securities Act of
1933
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Glossary
Underwriter
Securities dealer who brings bond issues to market by buying the
bonds from the issuer and reselling them to investors, and in doing so
assumes some financial risk.
Underwriter’s Attorneys who represent interest of underwriters by performing a due
Counsel
diligence review of the issuer to ensure the issuer’s financial condition
and matters disclosed in the POS/OS are accurate.
Bond Counsel Attorneys who represent interests of bondholders/investors by issuing
legal opinion that ensures bonds are legal obligations of issuer and
verifies tax status of debt.
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Setting the stage
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Overview of municipal securities regulatory
framework today
Existing exemptions
•
•
•
Muni securities generally exempt from Securities Act of 1933
registration requirements
State and local governments generally exempted from
Securities Exchange Act of 1934 reporting requirements
However, no exemptions provided from the anti-fraud
provisions of either the ’33 or ‘34 Acts
SEC’s limited authority over municipal market is
derived from
•
•
Ability to prohibit underwriters from purchasing muni bonds
unless issuer covenants to provide certain information to
investors at initial issuance and throughout life of the bonds
(SEC Rule 15c2-12)
Enforcement authority over anti-fraud provisions
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EMMA allows "one-stop shopping" for
municipal bond offering documents, periodic
disclosure documents, and real-time pricing
information
Through EMMA, the investing public can obtain
information virtually real-time, free of charge
(similar to the level of information available
through EDGAR for SEC-registered securities)
www.emma.msrb.org
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Auditor involvement in
bond offerings
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Phases of a muni offering
Preliminary official statement (POS)
• Issued to all prospective buyers of the securities
Official statement (OS)
• Issued at time of sale
• Identifies the debt service requirements
• Changes from POS typically not significant
Closing date
• Transaction is finalized and cash is transferred from the buyers
to the government
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Auditor involvement with official statements (OS)
“Auditor” refers to the party whose audit report
accompanies the external financial statements
included in the bond offering document
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Sources of AICPA guidance for auditors
AICPA audit & accounting guides
• State and Local Governments (AAG-SLV): Chapter 16, Auditor
Involvement with Municipal Securities Filings
• Health Care Entities (AAG-HCO): Chapter 7, Municipal Bond
Financing
• Not-for-Profit Entities (AAG-NPO): Chapter 10, Appendix A -Municipal Securities Regulation
Appendices A & B of AU-C Section 925, Filings With the
Securities & Exchange Commission Under the Securities
Act of 1933
AU-C Section 920, Letters to Underwriters and Other
Requesting Parties
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Recent developments
Historically, the “auditor involvement” guidance in the
AICPA guides was considered to be requirements
In updating the guides for the clarity project, several
“shoulds” in that guidance could not be linked back to
an auditing standard
In July, ASB’s Audit Issues Task Force (AITF) approved
establishing a task force to develop an auditing
standard to address the criteria for auditor
involvement in a muni offering and related auditor’s
responsibilities, based on that guidance
• Envisioned as a new muni-specific standard that would likely be
very similar to AU-C 925, Filings under Federal Securities
Statutes
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Activities that trigger involvement (AAG-SLV 16.07)
Reviewing draft of OS at client's request
“Consenting” to use of report in OS (i.e., providing
inclusion letter)
Issuing comfort letter, modified comfort letter, or agreedupon procedures (AUP) report related to OS
Assisting in preparing financial information included in OS
Signing (either manually or electronically) an auditor’s
report for inclusion in a specific OS
Providing a “customized” auditor's report for inclusion in
an OS
Performing attestation engagement relating to the debt
offering
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Activities that trigger involvement
“Consenting” to use of report in OS (AAG-SLV 16.21)
• In muni offerings, a “consent” is called an “inclusion letter”
• Issuance of an inclusion letter is not required by professional
standards
• If inclusion letter is requested, use language such as
We agree to the inclusion in [identify the document] of our report,
dated February 5, 20XX, on our audit of the financial statements
of [name of entity].
References:
•Exhibit A of AU-C Section 925, “Filings With the U.S. Securities and Exchange
Commission under the Securities Act of 1933”
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Activities that trigger involvement
“Consenting” to use of report in OS (continued)
• We are essentially updating our previously issued audit report through
a new date
• Add any matters discussed in the audit report (emphasis of matters,
etc.)
• Add consent to references to the auditor included in the offering
document
• Dated the date of the POS or OS for which consent is provided
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Activities that trigger involvement
“Consenting” to use of report in OS (continued)
• Resulting language for a consent may look like:
We consent to the references made to our firm under the headings “Introduction –
Professionals Involved in the Offering” and “Miscellaneous – Information In the
Appendices” and the inclusion of our independent auditor’s report on the basic
financial statements of Sample County (the “County”) as of and for the year ended
December 31, 2012, included in Appendix A to the Preliminary Official Statement
dated August 23, 2013 regarding the issuance of Sample County’s $50,000,000
General Obligation Bonds, Series 2012. Our report dated May 14, 2013 includes a
reference to other auditors and to the implementation of a new accounting standard
on the financial statement presentation and accounting for debt issuance costs. Our
report makes reference to the report of other auditors for the County Board of
Health, a discretely presented component unit, which represents 10% and 50%,
respectively, of the assets and revenue of the aggregate discretely presented
component units. The financial statements of the County Board of Health and the
auditor’s report thereon were furnished to us, and our opinion, insofar as it relates to
the amounts included for that entity, is based solely on the report of other auditors.
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Activities that trigger involvement
Issuing a comfort letter/AUP (AAG-SLV 16.14 - .18)
N
Requested by
underwriter?
Issue “SAS
72” letter
(AU-C 920
Example A-2)
Y
Required
representation
letter
provided?
*Rare
Y*
Issue “SAS
76” letter
N
(AU-C 920
Example Q)
Issue AUP
report
(AT 201)
“Nothing
came to our
attention….”
(negative
assurance)
Modified
comfort letter
(no negative
assurance)
Report of
findings
“Comfort letters” and AUP (Non-’33 Act Offering)
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Activities that trigger involvement
Issuing a comfort letter
• Representation letter provided by the requesting party
(discussed on previous slide) should be:
- addressed to the auditor;
- contain the statement, “The review process applied to the
information relating to the issuer, is, or will be, substantially
consistent with the due diligence process that we would
perform if this securities offering were being registered
pursuant to the Securities Act of 1933. We are
knowledgeable with respect to that due diligence process.”;
and
- signed by the requesting party.
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Activities that trigger involvement
Issuing a comfort letter
• Procedures typically include:
• Review of minutes
• Statement regarding inquiry of management of whether
certain financial balance have changed from the audited
financial statement balances
• May add agreed-upon procedures related to information in the
offering document
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Activities that trigger involvement
Issuing a comfort letter
• Letter should state the following:
- We had no responsibility for establishing (and did not
establish) the procedures performed.
- An audit of information discussed in the letter was not
performed.
- The procedures should not supplant any additional
procedures the requesting party would undertake.
- Restricted use type language regarding the use of the report.
- We have no responsibility to update the letter.
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Activities that trigger involvement
Issuing an Agreed Upon Procedures (AUP) Report:
• Are not limited to underwriters and certain intermediaries as
comfort letters are.
• Typically relate to agreeing information included in the offering
document to supporting documentation.
• Procedures performed should be agreed to, in writing, by the
addresses/recipients of the letter.
• Follow appropriate attestation engagement standards (AT 201).
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Activities that trigger involvement
Issuing an Agreed Upon Procedures (AUP) Report:
• AUP Do’s and Don’ts:
• Be specific about procedures - include what document the
information was agreed to or how a recalculation was
performed
• Try to avoid general comments such as “we traced to a
schedule provided by management”
• Do not make any comment regarding financial information
being in accordance with GAAP
• If stub information is addressed, do not give reasons for
variances – only disclose dollar amounts
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Activities that trigger involvement
Issuing an Agreed Upon Procedures (AUP) Report:
• Example procedure language showing tracing to different
sources as well as breaking out details of calculations:
•
We compared the amounts as of December 31, 2008, 2009, 2010 and
2011 in the table included under the caption “Historical Capital Structure of
the System” (page 31 of the Official Statement) to the audited financial
statements of Sample County for the years ended December 31, 2008,
2009, 2010 and 2011. We compared the unaudited amounts as of
December 31, 2012 to the trial balance of the Sample County Water and
Sewerage Authority as of and for the year ended December 31, 2012. We
recalculated the “Total Net Assets and Liabilities” by adding the “Total
Liabilities” and “Total Net Assets” for each year. We recalculated the “Ratio
of Long-Term Liabilities to Total Net Assets” by dividing the “Total LongTerm Liabilities” by “Total Net Assets” for each year. We recalculated the
“Long-Term Liabilities as a Percentage of Total Net Assets and Liabilities”
by dividing the “Total Long-Term Liabilities” by the “Total Net Assets and
Liabilities” for each year. No exceptions were noted which would require
further comment in this report.
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Question #1.
If we issue a consent for the inclusion of our audit
report on financial statements then we are
essentially updating our audit report through a new
date.
a) True
b) False
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Question #2.
If we are issuing either type of comfort letter allowed in
a municipal offering, then we can include negative
assurance (i.e. Nothing came to our attention…)
related to financial information of the issuing
government.
a) True
b) False
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Activities that trigger involvement
Assisting in preparing financial information included
in OS
In this situation, financial information does not refer to financial
statements covered by the auditor's opinion or the required
supplementary information (RSI) or supplementary information
other than RSI accompanying those financial statements that
the auditor already considered during his or her audit of the
financial statements.
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Activities that trigger involvement
Signing (either manually or electronically) an auditor’s
report for inclusion in a specific OS
This refers to the auditor providing an auditor’s report with
an original manual or electronic signature. It is not referring
to a reproduction of an auditor's report that was manually
or electronically signed.
For example, the underwriter or bond counsel may require
a copy of the auditor's report with an original manual or
electronic signature to file with the official closing
documents for the offering.
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Activities that trigger involvement
Providing a “customized” auditor’s report for
inclusion in a specific OS
The reports required by Government Auditing Standards (Yellow Book)
on ICFR and compliance with laws and regulations bear a “purpose
alert” under AU-C 905, and typically are not included in an OS
In such situations, it is generally advisable for an OS to use an auditor's
report on the financial statements that does not refer to the Government
Auditing Standards audit or to the reports on ICFR and compliance,
because those references (without inclusion of the reports) could
confuse the users of the OS (AAG-SLV 16.13).
Thus, the auditor might provide a “plain-vanilla” GAAS audit report
specifically for inclusion in the bond offering document.
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Activities that trigger involvement
Performing an attestation engagement related to the
debt offering
In connection with issuing bonds, the auditor may be engaged to attest
to certain information specifically involved with the offering (see AAGSLV 16.24)
VERIFICATION OF MATHEMATICAL ACCURACY
The accuracy of (i) the arithmetic computations supporting the conclusion that the
principal amounts of, and interest earned on, the government obligations to be acquired
with a portion of the proceeds of the Series 2012 Bonds, together with other monies, if
any, are sufficient to pay the Redemption Price of and interest on the Refunded Bonds
due through and including the Redemption Date and (ii) the mathematical computations
supporting the conclusion that the Series 2012 Bonds will not be "arbitrage bonds"
under the code, will be independently verified by ABC CPAs.
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Activities that trigger involvement
Performing an attestation engagement related to the
debt offering -- example
Parity letter (additional bonds test)
• Prior offerings may require this type of report in connection
with new bond issues that use the same revenue pledge as
old bonds
• Report indicates that certain criteria (typically a coverage
ratio) would have been met in the prior year even with the
new debt being issued
• Format: AT 201 agreed-upon procedures report
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Question #3.
Which of the following does not constitute involvement
by an auditor in a debt offering?
a) Providing a copy of the audit report – without
modification – for inclusion in the offering document
b) Preparing an agreed-upon procedures report related
to information included in the offering document
c) Being asked, by the issuer, if the auditor needs to be
involved in an offering
d) Simply looking over the offering document at the
request of the issuer – but not being asked to
provided anything.
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Question #4.
If we are considered to be involved in an offering, then
we should issue a consent letter.
a) True
b) False
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Question #5.
We should never change our audit report for inclusion
in an offering document.
a) True
b) False
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Procedures when auditor is involved
Ideally should be involved during POS preparation
Reading the O/S (AU-C 720)
• Be alert for information that is materially inconsistent with what’s
in the financial statements covered by the auditor’s report
“Keeping current” procedures related to auditor’s
report (AU-C 560)
• Read all available information relating to the entity's financial
and accounting matters
• Make inquiries
• Inquire of legal counsel
• Obtain a management representation letter related to
subsequent events period
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If the auditor is not involved
Best practice
• Consider including a requirement in the engagement letter that
any OS issued by the client with which the auditor is not
involved will contain language clearly indicating that the auditor
is not involved (AAG-SLV 16.12)
ABC CPAs, the independent auditor for the Town, has not
been engaged to perform and has not performed, since the
date of their report included herein, any procedures on the
financial statements addressed in their report included in this
Official Statement. ABC CPAs also has not performed any
procedures relating to this Official Statement.
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Describing the auditor’s role
If auditor’s role is described in the OS, use the
following language:
INDEPENDENT AUDITORS
The financial statements as of December 31, 19XX and for the
year then ended, included in this offering circular, have been
audited by ABC, independent auditors, as stated in their
report(s) appearing herein.
References:
• AAG-SLV par. 16.20
• Exhibits A and B of AU-C Section 925, “Filings With the U.S. Securities and
Exchange Commission under the Securities Act of 1933”
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Describing the auditor’s role
Inappropriate references – “expertization” (AAG-SLV 16.20)
EXPERTS
The financial statements as of December 31, 19XX and for the
year then ended, included in Appendix A of this offering circular,
have been audited by ABC CPAs, independent auditors, as stated
in their report appearing herein.
INDEPENDENT ACCOUNTANTS
Set forth in Appendix A are the consolidated financial statements of
the District for the fiscal year ending June 30, 2011 as audited by
ABC CPAs. These audited financial statements have been included
in reliance upon the reports of such firm given their expertise in
accounting and auditing.
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Voluntary involvement (AAG-SLV 16.11)
Occurs when engagement letter requires client to
request auditor’s permission to use auditor’s report
in connection with a sale of securities
• In such cases, auditor is involved even if no “mandatory” triggers
have occurred
“The Company may wish to include our report on these financial statements
in a registration statement proposed to be filed under the Securities Act of
1933 or in some other securities offering. You agree that the
aforementioned audit report, or reference to our Firm, will not be included in
any such offering without our prior permission or consent. Any agreement to
perform work in connection with an offering, including an agreement to
provide permission or consent, will be a separate engagement.”
Important: Both parties should understand
what constitutes “use of the report”
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Can you spot the inconsistency?
GENERAL CONSIDERATIONS
The District's financial statements for the year ended June 30,
2011, were audited by ABC CPAs, and have been included
herein as Appendix A. ABC CPAs has agreed to the
publication of its audit opinion on such financial statements in
this OS. ABC CPAs has not been engaged to perform any
updating procedures subsequent to the date of its audit report
on the June 30, 2011 financial statements.
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Special financial reporting situations
Common types of financial statements that might be
requested for inclusion in an OS
• Stub-period audits or reviews
• Condensed financial statements
• Fund financial statements
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Common Sections of the Official Statement
• Introduction, Plan of Financing, The
Bonds
• Gives overview of issuance, purpose of bonds, payment terms,
etc.
• The Issuer
• Describes government similar to basic info. in the footnotes and
MD&A – typically focuses on outstanding debt, financial history
for last 5 years, property tax information, postemployment
benefit plans, and insurance information
• Legal Matters
• Discloses pending litigation and other legal information affecting
bonds
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Common Sections of the Official Statement
• Miscellaneous
• Gives more detail on parties involved, including Independent
Auditor’s
• Appendix A
• Typically the most recent audited financial statements of issuer
• Other Appendices
• Various documents such as legal opinion and certifications
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Engagement Tips When Involved
Early communication with involved parties to
determine what we will be performing
See if partial (basic) or complete FS will be included
• Make sure they are including at least the full basic set of
statements.
Use some type of standard work program to
document procedures to be performed
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Engagement Tips When Involved
Obtain engagement letter
• Not necessarily required if only issuing consent.
• For AUP or comfort letter – will need documentation and
agreement of procedures to be performed.
Consider the need for representation letter
• Need one if issuing consent letter or comfort letter
• Suggested for AUP letter
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Question #6.
Under professional standards, we, as auditors, have to
be involved in the public bond offering process if our
audit report on the financial statements are included
in the offering document.
a) True
b) False
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Question #7.
When is the best time to be involved in the issuance
process?
a) As long is it is before closing of the bonds.
b) Between the issuance of the POS and the OS.
c) Before the issuance of the POS.
d) Never.
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Auditor involvement with
continuing disclosure
documents
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Auditor involvement with continuing
disclosure documents
Continuing disclosures = disclosure documents
disseminated subsequent to initial issuance of the
bonds
Also referred to as secondary market disclosures
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Continuing disclosure requirements
SEC Rule 15c2-12
• Issuer/obligor must agree to implement a system of continuing
disclosure that remains in effect as long as the bonds are
outstanding.
• The core of this system is the continuing disclosure agreement
Continuing disclosure agreement
• Issuer/obligor covenants to provide certain specified information
to bondholders throughout life of bond issue
• Required elements
- Annual reporting of financial and operating information
- Reporting of significant events
• Quarterly reporting requirement may also be established as part
of the covenant (but is not mandatory under Rule 15c2-12)
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Comparison:
’34 Act requirements vs. muni requirements
Disclosure filings required subsequent to initial
issuance of securities
Registrants
Periodic
filings
Filing
site
10-K
Muni issuer/obligors
Annual financial/operating info
8-K
Quarterly filings (if required by
covenant)
Event notices
EDGAR
EMMA
10-Q
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Auditor involvement – continuing disclosure
filings (AAG-SLV 16.10)
Auditor is not required to undertake any procedures
with respect to a client's continuing disclosure
documents, even if those documents include
audited financial statements
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SEC developments
Governmental Audit Quality Center
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Director
Commissioner Mary Jo
White
Chairman
Office of Municipal
Securities
Governmental Audit Quality Center
Key players
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Commissioner Kara Stein
Former Commissioner
Elisse Walter
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SEC report
Issued July 31, 2012
Based on public hearings
held during 2010 - 2011
Goal: ensure that municipal
investors have offering
documents and periodic
reports similar to those for
corporate securities.
Expected to lead to a formal
request to Congress for
authority to regulate
municipal securities issuers
and conduit obligors
www.sec.gov/news/studies/2012/munireport073112.pdf
Governmental Audit Quality Center
#AICPAGovtNFP
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Key disclosure recommendations
Allow SEC to establish baseline disclosure
standards for offering documents and periodic
reporting
Government financial statements prepared for use
by investing public should comply with GASB
standards
Audited financial statements required where
appropriate
Eliminate exemption for non-municipal conduit
bonds
Municipal issuers should establish disclosure
controls (policies and procedures)
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Uptick in 2013 enforcement activity
Primary offerings and continuing disclosure
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SEC Emphasis on Pension Disclosures in
Offering Documents
In a September 2013 speech, John Cross stated that
SEC scrutiny of pension disclosure will be "a
continuing and very significant theme of the SEC“
SEC interest in pension disclosures prompted the
National Association of Bond Lawyers (NABL) to
convene a multi-organizational task force (including
AICPA) to develop best practice document
Access the NABL document titled, Considerations in
Preparing Disclosure in Official Statements
Regarding an Issuer’s Pension Funding Obligations
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Top 10 Do’s and Don’ts for Muni Market from
SEC Muni Market Speech
1.
Do provide current financial information and update material financial
information known to be outdated and misleading.
2.
Do take appropriate steps to prevent dissemination of materially false or
misleading information and consider establishing disclosure controls and
procedures and effective internal control over financial reporting.
3.
Do enhance disclosure by giving investors the information they need (e.g.,
material liabilities, material risks, derivatives)
4.
Do highlight information that investors need in a manner that brings this
information to their attention, using language that all investors can
understand. Try to avoid complex, legalistic, and opaque language.
5.
Do use web sites with carefully prepared information to communicate with
investors and the market . Commission guidance on the use of company
websites in the corporate context can be relevant and helpful to the municipal
marketplace as well.
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Top 10 Do’s and Don’ts for Muni Market from
SEC Muni Market Speech
6.
Don’t forget about the auditor’s consent where audited financial
statements are used.
7.
For conduit issues with credit enhancement or a letter of credit
backing the payment on the securities, don’t omit information on the
underlying obligors in primary offerings or in continuing disclosure
documents.
8.
Don’t omit information about conflicts of interest.
9.
Don’t ignore obligations in continuing disclosure agreements –
disclose significant events as required by Rule 15c2-12 in keeping
with the spirit of that rule.
10. Don’t forget the importance of filing timely, accurate, and complete
information on EMMA. Investors and the marketplace are relying on
this.
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SEC Municipal Advisor Rule
Final SEC Rule issued 9/2013 establishes a permanent
registration system of municipal advisors
• Once registered, municipal advisors are required to meet certain reporting
responsibilities.
Final Rule Definitions
• Municipal Advisor is a person (who is not a municipal entity or an
employee of a municipal entity) that (i) provides advice to or on behalf of a
municipal entity or obligated person with respect to municipal financial
products or the issuance of municipal securities.
• Advice excludes, among other things, the provision of general information
that does not involve a recommendation regarding municipal financial
products or the issuance of municipal securities, including with respect to
the structure, timing, terms, and other similar matters concerning such
financial products or issues
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SEC Municipal Advisor Rule
Accountants that provide audit and attestation
services are exempt
Other accountant services that meet the definition of
“advice” will trigger municipal advisor status and
require registration
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Questions???
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How do I get my CPE certificate?
Just follow these steps:
1. Log on to CPA2Biz.com
2. Click on “My Account” at the top of the page and enter your
CPA2Biz/AICPA username and password
3. Click on “My Web Events” tab
4. Click on “AICPA Learning Center Transcripts and Certificates”
link (a new window or tab will open)
5. On the AICPA Learning Center, click on “My Transcript” in
the left-hand menu
6. Locate your completed course and click on “Go” to retrieve
your certificate.
Please note that it may take up to 24 hours for your certificate to be
placed into your account.
If you need assistance with locating your certificate, please contact
the AICPA Service Center at 888.777.7077 or service@aicpa.org.
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Evaluations
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Web event
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