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?
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?
“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?”
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.
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.
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.
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.