Changes in the language of engagement letters used by accounting firms prior to a transaction being offered have caught issuers and underwriters off guard. As a result, some deals initially scheduled for an earlier date are just hitting the market now and deals now in the planning stages could be in for a delay. The changes, which have been in the planning stages since last year, just recently came to fruition, and issuers have had trouble getting their arms around the new documentation.

The first accounting firm to implement such changes is Deloitte & Touche, arguably the leading accounting firm in the securitization industry, which one source described as "the most aggressive accounting firm on this front," by one source. Other sources have heard of changes afoot from the other three large accounting firms in how they outline responsibilities and liabilities in these engagement letters. This change in no way has any impact on the actual procedures taken by the accountants or at the issuer, it was also noted. But as a result of these changes, and the subsequent negotiations back- and-forth between the issuer, underwriter and accounting firm, at least one transaction was delayed by more than a week.

"This is definitely a trend in the accounting industry," one banker said. "All accounting firms are currently seeking to limit potential liability going forward," he added.

In the engagement letter, typically a straightforward form, the issuer and underwriter dictate the accounting firm's responsibilities with regard to "attribute testing" of pool statistics and the accounting firms' reverse engineering of the structure.

"We used to receive a much more simplistic [engagement] letter," said a source at an issuer that saw its transaction delayed. "Nobody at our [issuer] counsel had seen a form like this before and this [new] form included more caveats to their responsibility."

After receiving the updated engagement letter, the negotiations lasted weeks, with the parties debating the definition of the word "error," according to sources. "It was an argument over verbiage - semantics," the disgruntled issuer said.

Also clarified further is the permitted distribution of the accountants' report, meaning what the issuer and underwriter can or can't do with the final report, with the signing accounting firm's permission. But "the underwriter needs to use the report as a due- diligence defense," one source said.

Of course, as a consumer of the accounting firm's services, an issuer does have the right to simply take its business elsewhere. But, as one source explained, "Right now, there is a certain stigma attached to changing accounting firms and any potential new firm would need even more time to get acquainted with the deal." Issuers have heard rumblings for over a year that the use of procedures process was due for an overhaul, but until recently issuers had not seen any material changes and were thrown for a loop when the first of its kind finally hit.

"All we want, as an issuer, is for an accountant to claim responsibility for their calculations," the issuer source added. The issuer plans to approach industry representative groups to create a standardized form for this process, thereby removing some of the confusion experienced in this, incipient, process.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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