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Unit 10: Audit of Financial Statements

The cash collected from the portfolio is distributed to the investors and others as specified by the Notes
legal documents that establishes the SPV.
The process of securitization of receivables normally has the following two stages, i.e. in the
first stage there should be pooling and transferring of homogenous assets to a bankruptcy
remote vehicle (SPV) and the second stage comprises of repackaging and selling the security
interests represented by the claims on the incoming cash flows from the pool of assets, to the
third party investors should be effected.
The micro stages involved are:

1. The originator identifies the assets he wants to securitize for raising funds.
2. The SPV is formed.
3. The SPV is funded by investors and the SPV issues the securities to the investors. This
referred to as financial closure.
4. The SPV acquires the receivables under an agreement at their discounted value.
5. The servicer for the transaction is appointed, normally the originator.

6. The debtors are/are not notified depending on the legal requirements.
7. The servicer collects the receivables, usually in an escrow mechanism and water fall
arrangement, and pays off the collection to the SPV.

8. The SPV either passes the collection to the investors, or reinvests the same to pay off to
investors at stated pre-determined intervals.
9. In case of default, the servicer takes action against the debtors as the SPV agent.

10. When only a small amount of outstanding receivables are left to be collected, the originator
may clean up the transaction by buying back the outstanding receivables.
11. At the end of the transaction, the originator’s profit, if retained and subject to any losses
and expenses to the extent agreed upon by the originator, in the transaction is paid off.

Notes Securitization transactions cannot be undertaken without an SPV.

10.9.2 Independent Assessment of SPV

For ensuring the SPV remaining independent the auditors must ensure the following:
1. The originating bank transferring the assets to the SPV should not hold any interest,
direct or indirect in the Trustee Company. The originator should under no circumstances
support losses of SPV. The Trust should be non-discretionary. The decision-making or
the disguised substance that the originating bank continues to dominate the transactions
must be identified. The transactions should be at arm’s length, auditors would have a
crucial role to play in ensuring that the comparable market quotations are available on
records and the investment instruments (PTCs) are independently rated.
2. True Sale Compliance: For ensuring true sale of the pool by the Originator to the SPV,
certain conditions with regard to establishment of no investments in the SPV except
limited to 5 %, the originator should not have any interest or commitment whatsoever for
repurchase of assets. Except clean up calls and non-maintenance of effective control over
transferred assets, all risk and rewards should have been transferred along with the assets.

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