Preparing Financial Statements: Which Standards Apply?

By Charles Hall | Preparation, Compilation & Review

Feb 27

SSARS 21 added a new section to the compilation and review standards called Preparation of Financial Statements. Since then, I’ve received several questions about which standards apply when financial statements are prepared–especially if you concurrently provide another service such as a compilation, review, or audit.

Those questions include:

  • Can an accountant perform a compilation and not prepare the financial statements?
  • Are the preparation of financial statements and the performance of a compilation engagement two separate services?
  • If an auditor prepares financial statements and audits a company, what is the relevant standard for preparing the financial statements?
  • Is the preparation of financial statements a nonattest service, though the audit is an attest service?
Picture is courtesy of Dollarphoto.com

Picture is courtesy of Dollarphoto.com

Below I provide: (1) a summary of how compilations changed with the issuance of SSARS 21 and (2) a summary of how the preparation of financial statements service interplays with compilations, reviews, and audits.

The Old Compilation Standard 

Using SSARS 19, the performance of a compilation involved one service which encompassed:

  • Preparing financial statements,
  • Performing compilation procedures (e.g., reading the financials), and
  • Issuing a report

How Compilation Engagements Changed 

So, how did SSARS 21 change compilations?

If an accountant prepares the financial statements and performs a compilation engagement using SSARS 21, she is performing two services (not one). In this case, the performance of the preparation of financial statements is not subject to any formal standard (including SSARS 21).

When an accountant performs both the preparation of financial statements and a related compilation engagement, is AR-C 70, Preparation of Financial Statements, applicable?

No.

“Wait…you’re saying that a new standard called Preparation of Financial Statements was added with SSARS 21, but when the accountant prepares financial statements and performs a compilation engagement, the (SSARS 21) preparation standard is not applicable?”

Yes.

AR-C 70, Preparation of Financial Statements, states that the standard is not applicable “when an accountant prepares financial statements and is engaged to perform an audit, review, or compilation of those financial statements.” So if an accountant prepares financial statements as a part of a compilation engagement, AR-C 70 does not apply.

Why?

If AR-C 70, Preparation of Financial Statements, and AR-C 80, Compilation Engagements, were both in play, they would conflict. AR-C 70 requires the accountant to state on each financial statement page that “no assurance is provided” or to issue a disclaimer. AR-C 80 requires the issuance of a compilation report and does not allow the accountant to state that “no assurance is provided” on each financial statement page or for the accountant to issue a disclaimer.

Meaning?

When the accountant prepares financial statements and performs a related compilation, the creation of the financial statements is a nonattest service with no particular guidance–not even from SSARS 21. (Of course, the AICPA Code of Professional Conduct applies to all services.)

When a compilation engagement (an attest service) is performed and financial statements are prepared (a nonattest service), two separate services are being performed by the same accounting firm.

The Interplay of Financial Statement Preparation and Other Services

The table summarizes which standard is applicable when:
1. A preparation engagement is performed (alone)
2. Preparation and compilation engagements are performed for the same time period
3. Preparation and review engagements are performed for the same time period
4. Preparation and audit engagements are performed for the same time period

Preparation of Financial StatementsCompilation EngagementReview EngagementAudit EngagementStandard to Follow
YesAR-C 70 Preparation
YesYesAR-C 80 Compilation
YesYesAR-C 90 Review
YesYesAU-C Audit Sections

AR-C 70, Preparation of Financial Statements, applies only in the first example above. When the accountant performs a preparation service and a compilation, review, or audit service for the same time period, AR-C 70 is not applicable–that is, no formal standard applies to the preparation service.

In all the examples listed above, the preparation of financial statements is a nonattest service.

In examples 2, 3 and 4 (where a preparation service and an attest service are provided), your engagement letter should include language about performing nonattest services and how the client will assign someone with suitable skill, knowledge, and experience to oversee the preparation of financial statements service. Such language is only required when a nonattest and an attest service is provided.

SSARS 22 and 23

Since the above information deals with SSARS 21, you may be wondering what additional SSARS have been issued–and how those newer standards affect compilations. 

SSARS 22, Compilation of Pro Forma Financial Information was effective for compilation reports dated on or after May 1, 2017. So, what is pro forma information? It is a presentation that shows what the significant effects on historical financial information might have been had a consummated or proposed transaction (or event) occurred at an earlier date.

SSARS 23, Omnibus Statement on Standards for Accounting and Review Services, was issued in late October 2016. That standard changed supplementary information wording in compilation and review reports

The primary impact of SSARS 23 is to provide standards for the preparation and compilation of prospective financial information.

While portions of SSARS 23 were effective upon issuance (the supplementary language change), the remainder of the standard was effective for prospective financial information prepared on or after May 1, 2017, and for compilation reports dated on or after May 1, 2017, respectively.

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About the Author

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.

Leave a Comment:

(4) comments

Charles Hall May 31, 2015

Armando, I am glad you found this post timely for your compilation. Hope everything is going well for you there on the west coast. It ‘s warming up here in Georgia. Hot today!

Reply
armando balbin May 31, 2015

Generally, I only perform audit and AUP services. This great guide is timely as I am about to perform compilation services for a not-for-profit. Thanks, Charles.

Reply
Morgan January 7, 2016

Thanks so much for the information. I have a question. We are performing monthly compilation services for clients. We currently have compilation engagement letters for ALL of 2015, including December. If we decide to perform a preparation engagement for December 2015, do we just need to issue a new preparation engagement letter for “interim and annual” December 2015 statements? Will this override the compilation engagement letter or is this a conflict?

Reply
Charles Hall January 7, 2016

Morgan, this a legal question (and I’m not an attorney), but I do think you can get a new letter that covers December 2015 and the next year. This is what I would do. You may want to say in the new engagement letter that it supersedes any previous contract. See: https://cpahalltalk.com/dont-get-tripped-by-ssars-21/ Hope this helps.

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