What financial statement references are required at the bottom of financial statement pages? Is there a difference in the references in audited statements and those in compilations or reviews? What wording should be placed at the bottom of supplementary pages? Below I answer these questions.
Audited Financial Statements and Supplementary Information
First, let’s look at financial statement references in audit reports.
While generally accepted accounting principles do not require financial page references to the notes, it is a common practice to do so. Here are examples:
See notes to the financial statements.
The accompanying notes are an integral part of these financial statements.
See accompanying notes.
Accountants can also–though not required–reference specific disclosures on a financial statement page. For example, See Note 6 (next to the Inventory line on a balance sheet). It is my preference to use general references such as See accompanying notes.
Audit standards do not require financial statement page references to the audit opinion.
Supplementary pages should not include a reference to the notes or the opinion.
The Statements on Standards for Accounting and Review Services (SSARS) do not require a reference (on financial statement pages) to the compilation or review report; however, it is permissible to do so. What do I do? I do not refer to the accountant’s report. I include See accompanying notes at the bottom of each financial statement page (when notes are included). This reference to notes, however, is not required, even when notes are included. (Notes can be omitted in compilation engagements.)
You are not required to include a reference to the accountant’s report on the supplementary information pages. Examples include:
See Accountant’s Compilation Report.
See Independent Accountant’s Review Report.
What do I do? I include a reference to the accountant’s report on each supplementary page. But, again, it’s fine to not include a reference to the report.
Preparation of Financial Statement Engagements
Additionally, SSARS provides a nonattest option called the preparation of financial statements (AR-C 70). This option is used by the CPA to issue financial statements that are not subject to the compilation standards. No compilation report is issued. AR-C 70 requires that the accountant either state on each page that “no assurance is provided” or provide a disclaimer that precedes the financial statements. AR-C 70 does not require that the financial statement pages refer to the disclaimer (if provided), but it is permissible to do so. Such a reference might read See Accountant’s Disclaimer.
If your AR-C 70 work product has supplementary information, consider including this same reference (See Accountant’s Disclaimer) on the supplementary pages.
Are you aware of the option in the SSARS titled Preparation of Financial Statements (AR-C 70)? Many CPAs still believe the lowest level of service in the SSARS is a compilation, but this is not true. CPAs can and do issue financial statements without a compilation report. Today I provide an in-depth look at AR-70, Preparation of Financial Statements.
But before I do, here’s video explaining the differences in preparation and compilation engagements.
Preparation of Financial Statements
Guidance
AR-C 70, Preparation of Financial Statements, is the guidance for the preparation of financial statements.
Applicability – AR-C Section 70
AR-C section 70, Preparation of Financial Statements, is applicable when a public accountant is engaged to prepare financial statements or prospective financial information.
This section can also be applied to the preparation of other historical financial information (e.g., schedule of rents).
AR-C 70 does not apply when the accountant prepares financial statements or prospective financial information:
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
Are there other times when AR-C 70 is not applicable? Yes. The preparation guidance does not apply when the accountant is merely assisting in the preparation of financial statements; such services are considered bookkeeping.
Examples of bookkeeping services include:
Preparing or proposing certain adjustments, such as those applicable to deferred income taxes or depreciation
Drafting financial statement notes
Entering general ledger transactions or processing payments in the client’s accounting software
When AR-C 70 is applicable, certain compliance actions—such as the creation of a signed engagement letter—are required. If the accountant is merely assisting with bookkeeping services, AR-C 70 is not triggered, and compliance with the standard is not necessary.
If the accountant is only entering transactions into a general ledger and making journal entries, he is merely assisting with bookkeeping. Such assistance is often provided in an online bookkeeping software such as QuickBooks. If this is the only service provided, AR-C 70 is not applicable.
If the accountant is engaged to prepare financial statements and performs any of the following, then AR-C 70 applies.
The accountant prepares financial statements that are provided to another accountant (another firm) for audit purposes
The accountant prepares financial statements separately from a tax return (e.g., the accountant might prepare a tax return that includes financial statements and then—at the client’s request—creates financial statements separately from the return)
The accountant uses the client’s general ledger information to prepare financial statements outside of the accounting software (e.g., the accountant places information from a Quickbooks general ledger into Excel and creates financial statements)
As you can see, the preparation standard makes a distinction between:
Preparing financial statements (which triggers AR-C 70) and
Merely assisting (which does not trigger AR-C 70)
Are there any other situations where AR-C 70 does not apply? Yes. The AICPA’s Center for Plain English Accounting addressed this question in the following question and answer:
Q: If financial statements are prepared by the accountant as a by-product of another engagement (for example, an engagement to prepare a tax return), is the accountant required to follow section 70 of SSARS No. 21 and include any special disclaimer or “no assurance” statement on those financial statements?
A: No. The accountant is only required to perform the preparation engagement in accordance with section 70 of SSARS No. 21 when engaged to prepare financial statements. Therefore, because the accountant was not engaged to prepare the financial statements, there is no requirement to include a statement on each page of the financial statements indicating that no assurance is provided on the financial statements.
The author requested that the AICPA define the word engaged. They responded that a client’s request for the preparation of financial statements service is the trigger for being “engaged.” In other words, a client’s request for the preparation of financial statements means we are “engaged,” provided we accept the work. Once the client makes the request, the accountant will create an engagement letter in compliance with AR-C 70.
If the client does not request the preparation of financial statements and the accountant creates the statements as a byproduct of another service (e.g., tax return), he is not subject to the requirements of AR-C 70.
So when is AR-C 70 applicable? When a public accountant is engagedtoprepare financial statements.
AR-C 70 Objective
The objective of the accountant is to prepare financial statements in accordance with the chosen reporting framework.
AR-C 70 Reports
A compilation report from the accountant is not required (and should not be provided) when preparing financial statements under AR-C 70.
Financial Statements
The accountant can prepare financial statements as directed by management or those charged with governance. The financials should be prepared using an acceptable reporting framework such as the following:
Cash basis
Tax basis
Regulatory basis
Contractual basis
Other basis (as long as the basis uses reasonable, logical criteria that are applied to all material items)
Generally accepted accounting principles (GAAP)
When preparing financial statements in accordance with a special purpose framework (e.g., tax basis), the accountant is required to include a description of the financial reporting framework either on the face of the financial statements or in a note. Here’s a sample disclosure in a financial statement title: Statement of Assets, Liabilities, and Equity—Tax Basis.
Management determines the financial statements to be prepared. Financial statements normally include the following:
Balance sheet
Income statement
Cash flow statement
The accountant can, if so directed by management, create and issue just one financial statement (e.g., income statement).
The financial statements can be for an annual period or for a shorter or longer period. So, financial statements can be for a fiscal year, quarterly, or monthly, for example.
The accountant should also obtain an understanding of the significant accounting policies to be used in the preparation of the financial statements.
In preparing the financial statement, the accountant may need to assist management with judgements regarding amounts or disclosures. The accountant should discuss these judgments with management. Why? So management can understand and accept responsibility for the financial statements.
Documentation Requirements – AR-C 70
The accountant should prepare and retain the following documentation:
Engagement letter (or contract)
The financial statements
Documentation related to significant consultations or professional judgments are to be included in the engagement file. Also, if the accountant departs from a relevant presumptively mandatory requirement, he should document the justification for the departure and how the alternative procedures performed were sufficient to achieve the intent of the requirement. (The SSARSs use the word should to indicate a presumptively mandatory requirement.)
AR-C 70 Engagement Letter
Is an engagement letter required for a preparation service? Yes. Moreover, the letter should be signed by the accountant or the firm and management or those charged with governance. A verbal understanding is not sufficient. Though AR-C 70 does not specify how often the engagement letter should be updated, it is best to do so annually.
The engagement letter should specify:
The objectives of the engagement
The responsibilities of management
The responsibilities of the accountant
The limitations of the preparation engagement
Identification of the applicable financial reporting framework
The agreement of management that:
Each page of the financial statements will include a statement that no assurance is provided, or
The accountant will issue a disclaimer stating that no assurance is provided
Whether the financial statements will:
Contain known departures from the applicable reporting framework, and
Whether substantially all disclosures will be omitted
No Report
As noted above, no compilation report will be issued for a preparation service. The preparation service is considered a nonattest, nonassurance service, and no compilation, review, or audit procedures are required.
The accountant will do one of the following:
On each financial statement page (including the related notes), indicate, at a minimum, that “no assurance is provided,” or
Provide a disclaimer (see example below)
If the accountant uses the first option, wording such as the following should be included on each page of the financial statements (including the related notes):
No assurance is provided on these financial statements
These financial statements have not been subjected to an audit or review or compilation engagement, and no assurance is provided on them, or
ABC CPAs prepared these financial statements in accordance with professional standards of the AICPA, and no assurance is provided
Other statements can be used to communicate that no assurance is provided, but the minimum wording must include “No assurance is provided.” The “no assurance” wording is made at management’s discretion, and the accountant’s firm name is notrequired to be included. The wording is normally placed at the bottom of each page. If the client does not allow the accountant to include such a statement on each page of the financial statements, the accountant should:
Issue a disclaimer (see below)
Perform a compilation in accordance with AR-C 80, or
Withdraw from the engagement
Preparation of Financial Statements Disclaimer
If the disclaimer option is used, AR-C 70 provides the following language:
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 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]
Though not required, the disclaimer can be placed on firm letterhead. Notice that the disclaimer language above has no disclaimer title. While the standard is silent about providing a title, the accountant may add one. For example, Accountant’s Disclaimer. A salutation is not required, but may be added.
Some accountants prefer to provide a disclaimer on letterhead. Why? Any third party reader can see that the accounting firm is involved in the preparation of the statements and that no assurance is provided.
A third party may not know that an external accountant was involved in preparing the statements if the “no assurance is provided” legend is used and the firm’s name is not included. Remember, however, it is the client’s decision as to whether the “no assurance” legend is added or a disclaimer is provided.
Independence
Preparation of financial statements is a nonattest, nonassurance service. When an accountant performs only a preparation engagement, consideration of independence is not necessary.
If an accountant signs client checks and performs bookkeeping services, independence is not required. Moreover, if the accountant prepares financial statements for the same client, independence is not required. Signing checks, bookkeeping, and the preparation of financial statements are all nonattest services.
But what happens if the accountant prepares financial statements using AR-C 70 (a nonattest service) and later issues a compilation report using AR-C 80? Suppose an accountant issues monthly financial statements for January through November with no compilation report (using the preparation option), but in December issues financial statements with a compilation report. The December compilation service triggers a requirement to consider independence.
Here’s a related question: Which of the following services, if any, may an accountant who is not independent provide?
Preparation
Compilation
Review
The answer is a preparation or compilation service. But if you are not independent in a compilation engagement, you must say so in the compilation report. Independence is required for review engagements.
Omission of Substantially All Disclosures
Can the accountant omit all disclosures (notes to the financial statements) in a preparation engagement? Yes. Alternatively, the accountant can provide selected disclosures or if needed, full disclosure. In short, the accountant can do any of the following:
Omit all disclosures
Provide selected disclosures
Provide full disclosure
Regardless, the engagement letter should describe the level of disclosure to be provided in the financial statements. Also, the omission of substantially all disclosures should be communicated either on the face of the financial statements or in a selected note. There is no provision in the preparation standard to report the omission of disclosures in the accountant’s disclaimer that precedes the financial statements.
The accountant can communicate the omission of disclosures by including wording such as the following at the bottom of each financial statement page or in a note:
Substantially all disclosures required by accounting principles generally accepted in the United States are not included.
Substantially all disclosures ordinarily included in financial statements prepared in accordance with the tax-basis of accounting are not included.
The accountant can also communicate the omission of disclosures in the title of the financial statements. For example:
ABC Company
Statement of Income
Substantially All Disclosures Omitted
December 31, 2020
Information Provided is Incomplete or Inaccurate
Deficiencies in the information provided to the accountant should be communicated to management, and the inaccuracy or incompleteness of such information should be corrected. Deficiencies in the information include insufficient records, documents, explanations, and judgments.
Reporting Known Departures from the Applicable Financial Reporting Framework
How should a departure from the applicable financial reporting framework be reported? Discuss the departure with management to see if it can be corrected. If it is not corrected, disclose the departure. How?
A departure from the applicable financial reporting framework should be disclosed either on the face of the financial statements or in a note. If it takes more than a few words to describe the departure, note disclosure may be the better option—you’ll have more room there. There is no provision in the preparation standard to disclose departures in the accountant’s disclaimer that precedes the financial statements.
AR-C 70 Other Historical or Financial Information
In addition to historical financial statements, AR-C 70 may be applied to the following:
Specified elements, accounts, or items of a financial statement, including schedules of:
Rents
Royalties
Profit participation, or
Income tax provisions
Supplementary information
Required supplementary information
Pro forma financial information
AR-C 70 Prospective Financial Information
AR-C 70 can be applied to prospective information.
Prospective financial information is defined as any financial information about the future.
Prospective financial information can be presented as:
A complete set of financial statements, or
One or more elements, items, or accounts
If you prepare prospective financial information, the summary of significant assumptions must be included Why? It is considered essential to the user’s understanding of such information.
If you prepare a financial projection, you should not exclude:
The identification of hypothetical assumptions, or
The description of the limitations on the usefulness of the presentation
AR-C 70 references the AICPA Guide Prospective Financial Information as suitable criteria for the preparation and presentation of prospective financial information.
AR-C 70 Prescribed Forms
Is it permissible to perform a preparation of financial statement engagement with regard to prescribed forms?
Yes. There is nothing in AR-C 70 that prohibits the accountant from performing a preparation engagement with regard to prescribed forms (e.g., bank personal financial statement). However, the accountant is required to follow all of the preparation guidance. Clients may not want to add wording to the prescribed forms such as “no assurance is provided” or “substantially all disclosures are omitted.” As an alternative to adding such wording, the accountant can provide a disclaimer before the prescribed form.
Selected notes can follow the form if needed. If this option is used, the order of the deliverable is as follows:
Disclaimer
Prescribed form
Selected notes
When a bank, credit union, regulatory or governmental agency, or other similar entity designs a prescribed form to meet its needs, there is a presumption that the required information is sufficient. What should be done if the prescribed form conflicts with the applicable basis of accounting? For example, what if the prescribed form requires all numbers to be in compliance with GAAP with the exception of receivables? Follow the form. In effect, the prescribed form is the reporting framework. Report departures from the prescribed form and its related instructions on the face of the financial statements (the form) or in a note.
Draft Financial Statements
The client may request a draft copy of the financial statements prior to final issuance. To avoid confusion, mark statements with words like:
Draft Financial Statements
Working Draft
Draft – Subject to Change
Preparation of Financial Statements – A Simple Summary
AR-C 70 is applicable when the accountant is engaged to prepare financial statements and is not applicable when the accountant is engaged to perform a compilation or if the accountant is merely assisting with bookkeeping
The objective of the accountant is to prepare financial statements in accordance with the chosen reporting framework
The financial statements can be prepared in accordance with GAAP or a special purpose reporting framework
The financial statements can be distributed to third parties (and not just management)
The accountant must either:
State on each financial statement page that “no assurance is provided,” or
Provide a disclaimer
Documentation requirements include:
The engagement letter, and
The financial statements
An engagement letter must be signed by:
The accountant or the accountant’s firm, and
Management or those charged with governance
No report (e.g., compilation report) is attached to the financial statements
Consideration of independence is not required
Substantially all disclosures can be omitted
The omission of substantially all disclosures should be:
Disclosed on the face of the financial statements, or
In a note
Selected disclosures can be provided
Departures from the applicable financial reporting framework should be:
Disclosed on the face of the financial statements, or
In a note
A preparation engagement can be applied to historical financial statements and historical information (e.g., specified items of a financial statement).
A preparation engagement can be applied to prospective financial information. The summary of significant assumptions must be included.
A preparation engagement can be performed in relation to prescribed forms (e.g., bank personal financial statements)
Mark draft financial statements with appropriate wording (e.g., Draft Financial Statements)
Which standards apply when you prepare financial statements?
The AICPA Accounting and Review Services Committee added a 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
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.
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 Statements
Compilation Engagement
Review Engagement
Audit Engagement
Standard to Follow
Yes
AR-C 70 Preparation
Yes
Yes
AR-C 80 Compilation
Yes
Yes
AR-C 90 Review
Yes
Yes
AU-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.
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.
SSARS 21 has been in existence since October 2014. What have we learned about this standard?
(SSARS 22 and SSARS 23 were subsequently added, but most of the SSARS 21 guidance remains as originally issued.)
Preparation of Financial Statements or Compilation Reports
Before SSARS 21, if an accountant created financial statements and submitted them to a client, he had to issue a compilation report. Now, using the Preparation of Financial Statements part of SSARS 21 (AR-C 70), an accountant can create and provide financial statements without a compilation report. Such financial statements can be provided to third parties such as banks–again with no compilation report. So, how have accountants responded to the option to provide financial statements to clients without a compilation report?
It has been my observation that many accountants continue to perform compilation engagements (rather than use the preparation option). Why? I think we are creatures of habit. We have issued compilation reports for so long that we’re comfortable doing so–and we continue to do the same. Also, as we’ll see in a minute, performing a compilation doesn’t take much additional time.
Some accountants, however, are using AR-C 70. They are issuing financial statements without a compilation report and stating that “no assurance is provided” on each page–or, as the standard allows, placing a disclaimer page in front of the financial statements.
Who Should Use the Preparation Standard?
So, who uses AR-C 70? Accountants with limited time.
Suppose, for example, that a client wants a balance sheet and nothing else. You can create the balance sheet in Excel and put “no assurance is provided” at the bottom of the page. And you’re done–with the exception of obtaining a signed engagement letter. (Accountants should document any significant consultations or professional judgments, but usually, there are none.)
Can I Avoid the Engagement Letter?
You may be thinking, “Charles, I’m not sure I’m saving much time if I have to create an engagement letter. Getting a signed engagement letter might even take more time than preparing the balance sheet.” Yes, that is true. So, is there a situation where the engagement letter is not required? Yes, sometimes.
Financial Statements as a Byproduct
You can provide the balance sheet to a client without obtaining an engagement letter if the statement preparation is a byproduct of another service (as long as you have not been engaged to prepare the financial statement). For example, if you’re preparing a tax return and create the balance sheet as a byproduct of the tax service, you are not required to obtain a SSARS engagement letter? Why? Because you have not been engaged to prepare the financial statement. The trigger for AR-C 70 is whether you have been engaged to prepare financial statements.
QuickBooks Bookkeeping
The same is true if you provide bookkeeping services using QuickBooks in the Cloud. If you have not been engaged to prepare financial statements and the online software allows you to print the financial statements, you are not in the soup. That is, you are not following AR-C 70–because you have not been engaged to prepare financial statements. If your client asks you to perform bookkeeping service in a cloud-based accounting package (such as QuickBooks) and to prepare financial statements, you are engaged. Then you must follow AR-C 70 and obtain an engagement letter–and follow the other requirements of the standard.
In most compilations, the accountant prepares the financial statements and performs the compilation engagement. Notice these are two different services: (1) preparing the financial statements and (2) performing the compilation. It is possible for your client to create the financial statement and for you (the accountant) to perform the compilation, though this is rare. If you do both, the preparation of financial statements is not performed using AR-C 70. So what standard should you follow for the preparation of the financial statements. There is none. You are just performing a nonattest service. Then you’ll perform the compilation engagement using AR-C 80.
So, the question at this point is whether you should prepare financial statements using AR-C 70 or create the financial statements and perform a compilation using AR-C 80. (Technically, the choice is the clients, but you are explaining the differences to them.)
Additional Time for Compilations
How much extra time does it take to perform a compilation engagement after the financial statements are created? Not much. You are only placing a compilation report on your letterhead (rather than stating that “no assurance is provided” on each page or providing a disclaimer that precedes the financial statements).
What other procedures are required for a compilation (versus providing the financial statements under AR-C 70)? You are reading the financial statements to see if they are appropriate. And since you just created the statements, that shouldn’t take much time.
Regardless, both AR-C 70 and AR-C 80 require signed engagement letters. So if you’ve been engaged to prepare financial statements or perform a compilation, there is no getting around the requirement for an engagement letter.
Is a Preparation or a Compilation Service Best?
So which is better? Using AR-C 70 (Preparation of Financial Statements) or AR-C 80 (Compilation Engagements)? It depends.
Some banks desire a compilation report, so in that case, of course, you are going to–at the request of the client–perform a compilation engagement.
Also, some CPAs feel safer issuing a compilation report that spells out (in greater detail than a preparation disclaimer) what is done and what is not done. We don’t know yet whether a preparation service creates greater legal exposure than a compilation. But we will with time. After a few years of using SSARS 21, I think our insurance companies will tell us whether one service creates more exposure than another. So far, I have not seen any such studies. Why? SSARS 21 has been in use only a couple of years.
Another factor to consider is peer review. The AICPA standards do not require a peer review if you only provide financial statements using AR-C 70. But check with your state board of accountancy; some states require peer review, regardless.
For the most efficient way to issue financial statements, click here.
SSARS 23 changes preparation and compilation engagements. The article summarizes the effects of the new standard.
The Accounting and Review Services Committee (ARSC) issued SSARS 23 in October 2016. Parts of the standard (e.g., that applying to supplementary information language in compilation and review reports) were effective immediately. Other parts (mainly regarding preparation and compilation of prospective information) are required as of May 1, 2017. This post tells you how SSARS 23 affects Preparation (AR-C 70) and Compilation (AR-C 80) engagements.
You’ll recall that ARSC issued SSARS 21 back in October 2014. It was effective for years ending December 31, 2015. A clarified version of the compilation and review standards is included in SSARS 21. SSARS 21 also provides new guidance for the preparation of financial statements. The Standard did not address prospective financial statements. Why? The AICPA was working on clarifying the Attestation Standards (SSAE 18), the place where compiled prospective financial statement guidance was (previously) housed. With the issuance of SSARS 23, the AICPA moved this guidance from the Attestation Standards to SSARS.
The primary impact of SSARS 23 is to provide standards for the preparation and compilation of prospective financial information.
How Preparation of Financial Statements (AR-C 70) Changed
The Preparation Standard (AR-C 70) now includes guidance regarding prospective financial information. SSARS 23 requires the inclusion of significant assumptions since they are essential to understanding prospective information. Therefore, accountants should not prepare prospective financial information without including a summary of significant assumptions in the notes. Also, a financial projection should not be created unless it includes:
an identification of the hypothetical assumptions, or
a description of the limitations on the usefulness of the presentation
One other change to AR-C 70 is the slight change to the preparation disclaimer. SSARS 23 deletes the word “accordingly.” See below:
How Compilation Engagements (AR-C 80) Changed
AR-C 80, Compilation Engagements, now applies to compilations of prospective financial information (new with SSARS 23), pro forma financial information (see SSARS 22), and other historical information (as provided for in SSARS 21).
Another change is that accountants should report known departures from the applicable financial reporting framework in the compilation report. Prior to SSARS 23, accountants could disclose such departures in the notes without doing so in the compilation report.
Prospective Financial Information Guidance
Additionally, AR-C 70 and AR-C 80 were amended to clarify that the AICPA Guide Prospective Financial Information provides comprehensive guidance regarding prospective financial information, including suitable criteria for the preparation and presentation of such information.
