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]
Can the financial statements omit disclosures?
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.
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.