Category Archives for "Preparation, Compilation & Review"

Preparation of financial statements and independence
Jan 14

Independence and Preparation of Financial Statements

By Charles Hall | Accounting and Auditing , Preparation, Compilation & Review

For many years, preparation of financial statements was considered a part of an attest engagement (audits, reviews compilations). No longer.

The Professional Executive Ethics Committee (PEEC) recently added guidance to the “Nonattest Services” interpretation as follows:

activities such as preparation of financial statements…are considered outside the scope of the attest engagement, and, therefore, are considered a nonattest service

Preparation of financial statements and independence

Consequently, if an accountant prepares financial statements (a nonattest service) and performs an attest service (e.g., audit, review, compilation), then consideration should be given as to whether: 

  • the client makes all management decisions,
  • the client properly oversees the service,
  • the client evaluates the adequacy and results of the service, and
  • the client accepts responsibility for the service

We have, for some time now, included the aforementioned language in engagement letters when we have performed both attest services and nonattest services. But the language referring to nonattest services usually addressed tax preparation, depreciation schedule preparation, bookkeeping and the like. Now preparation of financial statements should be listed as another nonattest service and the requisite language concerning client responsibilities (in the previous paragraph) applies to the preparation-of-financial-statements engagement.

The requirement to treat financial statement preparation as a nonattest service is effective for engagements covering periods beginning on or after December 15, 2014. If you, for example, perform a compilation engagement for January 2015 (i.e., a monthly financial statement), the new guidance is applicable. Of course, with regard to compilations, you can lack independence if it is noted in the compilation report. Not true for reviews and audits. CPAs are precluded from performing reviews and audits if their independence is impaired.

Here is the sample relevant paragraph from Illustration 1 of the compilation engagement letters in Section 80 of SSARS 21:

You are also responsible for all management decisions and responsibilities and for designating an individual with suitable skills, knowledge, and experience to oversee our preparation of your financial statements. You are responsible for evaluating the adequacy and results of the services performed and accepting responsibility for such services.

If other nonattest services are to be provided (e.g., tax return), they are to be listed alongside preparation of financial statements.

The client must accept responsibility for financial statements prepared as a part of an audit or a review for periods beginning after December 15, 2014. So, for example, if a client desires for you to perform a review engagement for the first quarter of 2015, the client must be able to oversee your preparation and accept responsibility for the financial statements. If the client is unable to accept that responsibility, then the accountant is not independent and would be precluded from performing the review engagement.

Simply including the standard language in the engagement letter (that management assumes responsibility) is not the same as management actually accepting responsibility.

Obviously, the determination of whether the client can (or has the ability to) accept responsibility is a subjective one. I anticipate additional guidance to be forthcoming from the AICPA to assist CPAs in making this decision.

Dec 06

The New Preparation of Financial Statements Standard

By Charles Hall | Preparation, Compilation & Review

The art of life is a constant readjustment to our surroundings. –Kakuzo Okakaura

Significant change has occurred in the compilation world.

  • The Accounting and Review Services Committee recently added a new twist to the standards that govern the preparation of financial statements. Now CPAs can issue financial statements without a compilation report. To do so, you need to follow the guidance in Section 70 (Preparation of Financial Statements) of SSARS 21. So let’s unwrap this package and see what’s inside.

First, when is the Preparation standard applicable?

Section 70 states it is not applicable when the accountant prepares financial statements:

  • and is engaged to perform an audit, review, or compilation of financial statements
  • solely for submission to taxing authorities
  • for inclusion in written personal financial plans
  • in conjunction with litigation services that involve pending or potential legal or regulatory proceedings, or
  • in conjunction with business valuation services

In other words, the standard applies when you create financial statements that are not for any of the above purposes.

If you create financial statements that will, for example, be used for litigation purposes, then Section 70 does not apply. If you create a balance sheet that is a part of a tax return, Section 70 is not applicable. If you are engaged to create financial statements as a part of a compilation, then, again, Section 70 doesn’t apply. (You will only issue a compilation report when you are engaged to do so. Under Section 70, no compilation report is issued. See my prior SSARS 21 post for more information.)

Difference in Preparation and Merely Assisting

The Preparation standard also makes a distinction between preparing financial statements and merely assisting in the preparation of financial statements.

Preparing refers to the creation of financial statements.

Merely assisting refers to bookkeeping services. Here are examples of accounting services that are not covered by Section 70:

  • Preparing or proposing certain adjustments, such as those applicable to deferred income taxes, depreciation, or leases
  • Drafting financial statement notes
  • Entering general ledger transactions or processing payments in accounting software

Independence Not Required

Bear in mind that the preparation of financial statements and related bookkeeping services (e.g., entering transactions into a general ledger) are both considered nonattest services. So you can do either without considering whether you are independent.

What does this mean? Well, I can process payments for a client (even sign checks or have custody of a client’s assets) and prepare financial statements. Am I independent? No. Does it matter? No, not if I am just preparing financial statements under the guidance of Section 70 (and not issuing a compilation report). Do I need to disclose my lack of independence? No. (If you do issue a compilation report, you need to disclose your lack of independence–as you have in the past.)

Must the accountant verify the accuracy or completeness of the information? No. Remember, however, that AICPA ethics rules prohibit a CPA from issuing financial statements that are intentionally misleading.

Required Wording or Disclaimer?

Each page of the financial statements should include, at a minimum, the words “no assurance is provided” or issue a disclaimer that makes clear that no assurance is provided.

The example disclaimer provided in .A12 of Section 70 reads as follows:

The accompanying financial statements of XYZ Company as of and for the year ended December 31, 20XX, were not subjected to an audit, review, or compilation engagement by me (us) and, accordingly, I (we) do not express an opinion, a conclusion, nor provide any assurance on them.

[Signature of accounting firm or accountant, as appropriate]

[Accountant’s city and state]

[Date]

Can the financial statements omit disclosures?

Yes.

The disclosure of the omission of substantially all disclosures may be made on the face of the financial statements or in a selected note to the financial statements. (Selected disclosure is permissible under Section 70.)

If disclosures are omitted and a special purpose framework is used, then the accountant should include a description of the financial reporting framework on the face of the financial statements.

Engagement Letter Required

An engagement letter is required by Section 70. Both the accountant and the client must sign the letter.

Documentation Requirements

The accountant should retain:

  • A copy of the financial statements
  • The signed engagement letter

That’s it: Nothing else is required.

The documentation may also include any significant consultations or professional judgments.

Subject to Peer Review?

My February 2015 AICPA Peer Review Update (newsletter) states the following:

On November 18, 2014, the Peer Review Board (PRB) issued an exposure draft, which proposed that firms that only perform preparation engagements under AR-C Section 70 – Preparation of Financial Statements (issued as part of Statement on Standards for Accounting and Review Services (SSARS) No. 21, Statement on Standards for Accounting and Review Services: Clarification and Recodification) would not be required to enroll in the AICPA peer review program (Program). However, it also proposed that a firm’s preparation engagements would be included in the scope of a peer review when the firm either elects to enroll in the program (e.g. to comply with licensing or other requirements) or is already enrolled due to other engagements it performs. This proposal was issued in order to address the effect of these engagements on the scope of the Program.

The PRB considered comments raised by the peer review community about the proposal and elected to adopt the proposed guidance changes. The changes are effective for peer reviews commencing on or after February 1, 2015.

The key points of this communication are:

  • Firms that only perform the Preparation of Financial Statement service under section 70 of SSARS 21 are not required to enroll in the AICPA peer review program.
  • Firms that are enrolled in the peer review program will have the Preparation of Financial Statements service included in the scope of their peer reviews.

Note that these are the AICPA rules. Peer review requirements may be more stringent in your state, possibly requiring a peer review–even if you only perform Preparation of Financial Statement engagements. Check with your state board of accountancy.

When can I apply Section 70 of SSARS 21?

Now, if early implemented.

When am I required to apply SSARS 21?

For periods ending on or after December 15, 2015.

 

SSARS 21 - A Summary of Preparation Services and Compilation Engagements
Oct 23

SSARS 21 – A Summary of Preparation Services and Compilation Engagements

By Charles Hall | Accounting and Auditing , Preparation, Compilation & Review

Today I listened to the AICPA SSARS 21 webcast. The speakers were Michael Brand (the chair of ARSC) and Mike Glynn (senior technical manager). They did an excellent job of presenting the SSARS 21 information.

Here is my summary of what I heard along with a few personal observations.

SSARS 21

Effective Date

SSARS 21 can be early implemented. The effective date is for financial statements ending on or after December 15, 2015. Also, interim (e.g., monthly) financial statements for the year 2016 will be performed in accordance with SSARS 21.

SSARS 21 – A Summary of Preparation Services and Compilation Engagements

So you are required to use SSARS 21 for your financial statements with periods ending December 31, 2015 and for all periods thereafter. You can apply SSARS 21 today (SSARS 21 was issued on October 23, 2014, and can be early implemented).

The effective date is based on the financial statement period-ends (e.g., 12/31/2015) and not the report date (e.g., January 20, 2016).

You do have to implement the standard in its entirety.

For now, you can apply the standard on an engagement-by-engagement basis; in other words, you can use SSARS 19 for ABC client and SSARS 21 for XYZ client. (It’s probably wiser to adopt SSARS 21 firm-wide, for all clients–to avoid confusion.) Of course, when the effective date of SSARS 21 occurs (December 15, 2015), you can no longer use SSARS 19.

Prepare and Present

The definition of “prepare and present”–the old trigger for issuing a compilation report–has blurred with the advent of cloud computing. For years, questions such as following have been asked:

  1. “Did you [the CPA] push the button” to create the financial statements?
  2. Am I (as a CPA) required to issue a compilation report?

SSARS 21 clarifies the trigger: the decision to issue a compilation report is based solely upon whether the CPA is engaged to do soand not upon whether the accountant prepares and presents (submits) the financial statements to the client.

Preparation of Financial Statements (Section 70)

Preparation of financial statements is a nonattest, non-assurance service. A signed engagement letter is required; the letter should be signed by management and the accountant. Evergreen letters (those that have no ending) are discouraged (not by the standard, but by common sense). The Peer Review Board recently issued an exposure draft to exclude preparation services from peer review; the final determination as to whether preparation services will be exempt from peer review has not been made at this time (October 23, 2014).

Section 70 applies whenever the accountant is engaged to prepare financial statements (and is not engaged to issue a compilation, review or audit report).

You are not required to be independent to prepare financial statements (since preparation is considered a nonattest service).

The accountant can omit disclosures if the client does not need them.

When preparing financial statements in accordance with a special purpose framework/OCBOA, the accountant is required to include a description of the financial reporting framework on the face of the financial statements or in a note to the financial statements.

Section 70 requires the use of a legend on each page of the financial statements stating no assurance is being provided. If management refuses or cannot include the legend, the accountant could issue a disclaimer report, perform a compilation engagement, or resign.

An example of a disclaimer follows:

The accompanying financial statements of XYZ Company as of and for the year ended December 31, 20XX, were not subjected to an audit, review, or compilation engagement by me (us) and, accordingly, I (we) do not express an opinion, a conclusion, nor provide any assurance on them.

[Signature of accounting firm or accountant, as appropriate]
[Accountant’s city and state]
[Date]

AICPA Code of Conduct Considerations

The AICPA Code of Conduct prohibits the CPA from being associated with financial statements that are misleadingSo if a client desires for the CPA to issue financial statements that are clearly misleading, then the CPA should not do so–even under the Preparation standard.

image

If the CPA prepares the financial statements for an audit or a review client, then Interpretation 101-3 (Independence) applies. The CPA needs to determine that the client has sufficient skill, knowledge, and experience (SKE) to assume the responsibility for the statements; if the client does not possess sufficient SKE, the CPA is not independent (and can’t perform an audit or a review). Independence is not required to issue a compilation report, but the lack on independence must be noted in the compilation report.

Compilation Engagements (Section 80)

The compilation report is shortened to differentiate it from audit and review (assurance) reports. The compilation report will not include paragraph headers; ARSC omitted the headers to distinguish compilation reports from assurance service reports (e.g., audits, reviews) that do include headers.

Section 80 requires an engagement letter signed by both the accountant and management/those charged with governance.

Section 80 can be applied to financial statements with or without disclosures.

A sample compilation report follows:

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, I (we) do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.

[Signature of accounting firm or accountant, as appropriate]
[Accountant’s city and state]
[Date]

Accountants will still add additional paragraphs to the compilation report when applicable. Examples follow:

  • When financial statements are prepared in accordance with a Special Purpose Framework/OCBOA
  • Disclosures omitted
  • Lack of independence
  • Known Departure From the Applicable Financial Reporting Framework
  • Supplementary Information Accompanies Financial Statements and the Accountant’s Compilation Report Thereon

Key Differences in Compilation and Preparation Services

 Compilation ServicesPreparation Services
When does the standard apply?Engaged to compileEngaged to prepare
Is an engagement letter requiredYesYes
Is the accountant required to determine if he or she is independent of the client?YesNo
If the accountant is not independent, is that fact required to be disclosed?YesN/A
Does the engagement require a report?YesNo - legend required that no assurance is provided
May the financial statements go to users outside of management?YesYes
May the financial statements omit notes?YesYes

For a more expansive summary, click here.

Questions

If I assist a client with entries on their computer system (bookkeeping assistance), am I required to issue a compilation report?

No. Bookkeeping assistance (a nonattest service) does not fall under the SSARS guidance.

Can I issue management-use-only financial statements under SSARS 8?

SSARS 8 no longer applies (once SSARS 21 is implemented). SSARS 21 provides a “Preparation” option which is similar to SSARS 8. The “Preparation” option allows you to provide financial statements to clients without a compilation report.

Can the accountant use one engagement letter to cover preparation services and compilation services?

Yes. If the accountant, for example, provides monthly financial statements for eleven months (as a preparation service) and compiled statements for the year-end, then one engagement letter can be used to cover both services. Alternatively, two separate engagement letters can be used, one for the preparation service and one for the compilation service.

 Update to Post

My SSARS 21 book is available on Amazon.com. You can see the book by clicking here: Preparation of Financial Statements & Compilation Engagements.

Do you still have questions about SSARS 21? Then see my SSARS 21 Preparation Services Questions and Answers post. 

The above post was written in October 2014. In September 2017, I wrote an article explaining what we learned from SSARS 21.

The above pictures are courtesy of DollarPhoto.com.

1 4 5 6
>