| DEFINITION: For a complex transaction such as an advance refund, the verification agent’s job is to ensure all the cash flows are calculated correctly by Treasury rules. |
Municipalities use verification agents for bond transactions.
Government organizations buy bonds and other securities all the time. And each time, there’s the need for some supervision from a verification agent.
For example, the organization may use a separate (escrow) account created to hold securities. The verification agent must ensure that all accounting gains or losses incurred in the process are legally and accurately recorded.
Another example is in the event of a refunding action.
Bond refunding is a strategy that governments use to save money by issuing new bonds to pay off a less-favorable outstanding bond with the money they raised.
The U.S. Tax Code requires a verification agent to oversee all refunding and account for all refunded bond transactions, especially if the transaction involves a profit.
Verification agents ensure that any investments purchased for the escrow account will be sufficient for debt service.
In the updated accounting code, verification agents must report all Net Present Value (NPV) savings, a function that was added to reduce the use of debt instruments for arbitrage in governmental organizations.
Verification agents handle cash flow transactions, including call-back costs, underwriting or administrative costs, taxes incurred, depreciation, and interest rates.
| RESPONSIBILITIES OF A VERIFICATION AGENT: The verification agent is to monitor, calculate, verify and report specific cash flows within the organization to ensure that they align with the laws and regulations. The calculations a verification agent handles include: Escrow security cash flowsEscrow securities reinvestment rateRefunded bonds principal and interest cash flowsRefunded bonds arbitrage yield (if executing a taxable refunding)Refunding bonds principal and interest cash flowsRefunding bonds arbitrage yield (if executing a taxable refunding)Any unique calculation, if applicable, for any specific issuer constraints. |
What’s important here?
The verification agent plays a necessary role in ensuring that all key cash flow calculations are accurate, unbiased, and timely performed before the investors receive the bonds.
Not only do they serve as a check for irregularities, but they may also play an advisory role in related decisions.