What is the most efficient way to issue financial statements?
This answer assumes you are preparing financial statements in conjunction with a tax return and that those financial statements are issued separately—apart from the tax return—to your client.
Accountants often create financial statements as a part of a tax return. So why not use the tax basis of accounting to create the separately issued financial statements? Doing so eliminates the need to convert the tax return numbers to another basis of accounting.
Using the preparation option, the accountant can include on each financial statement page that “no assurance is provided” and should include “tax basis” in the financial statement title. If management elects to omit substantially all disclosures, the accountant should disclose the omission in the financial statements—either on the face of the statements or in a note to the financials. The preparer is also required to obtain a signed engagement letter.
Tax basis financial statements are considered an other comprehensive basis of accounting and, therefore, do not require a cash flow statement. Moreover, if the notes are omitted, efficiency is enhanced even more. The end product: (1) a tax basis balance sheet and (2) a tax basis income statement—both agreeing with the tax return. You can’t get any simpler than that.
Another nice part of using the Preparation standard is you don’t have to be independent. You could, for example, assist with management decisions and issue financial statements without making independence disclosures (which is still required for compilations). Preparation is considered a non-attest service; consequently, independence is not a problem.
One other potential efficiency advantage to using the preparation method described above: A firm is not required to have a peer review (based on AICPA rules; some states may require a peer review) if it only issues financial statements using the provisions of Section 70 of SSARS 21.
In summary, the advantages of the tax basis financial statements are:
Management and third parties can receive these financial statements.
The Preparation of Financial Statements guidance in SSARS 21 requires the following documentation be maintained:
Section 70 provides for an alternative to placing “no assurance is provided” on each page of the financial statements: The alternative is to issue a disclaimer. The disclaimer can be placed on firm letterhead and signed by the firm. Some CPAs prefer this method since it clearly discloses the firm’s involvement in preparing the financial statements, and it clearly communicates that the firm is not expressing an opinion, conclusion, or any assurance.
The disclaimer wording provided in SSARS 21 is 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]
If you are preparing financial statements as you prepare a client’s tax return (and those financial statements are to be issued separately from the tax return), the most efficient financial statement option is to:
Listen now to my podcast about the Quickest Way to Issue Financial Statements.
For an overview of the Preparation Standard under SSARS 21, click here.
Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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