The AICPA accounting and review services committee issued guidance that provides options for accountants when submitting unaudited financial statements not expected to be used by a third party. SSARS no. 8, Amendment to Statement on Standards for Accounting and Review Services No. 1, Compilation and Review of Financial Statements, also discusses the means by which accountants can formally communicate with their clients about such financial statements.
A major change in the guidance was the new meaning assigned to the term submission. Under SSARS no. 8, submission of financial statements is defined as “presenting to a client or third parties financial statements the accountant has prepared either manually or through the use of computer software.”
Edward K. Zollars, CPA, tax and technology partner of Henricks, Martin, Thomas & Zollars, Ltd., a public accounting firm in Phoenix, said the new wording differs significantly from that of SSARS no. 1, which defines a submission as the accountant’s presentation of financial statements he or she has generated or his or her material modification of statements prepared by the client.
“The words ‘generate’ and ‘material modification’ are no longer part of the definition,” Zollars said. “Now, the key concepts are ‘preparing’ and ‘presenting.’ A submission consists of both the preparation and presentation of a financial statement. Accountants need to understand this clearly, but since there is no ‘bright line’ to guide them, it will take time and examples from the committee to explain exactly what these terms can mean.
“If a client sends me information and I print a financial statement on my computer, read it, bind it and mail it to that client, that is a submission under SSARS no. 8,” he said. “But, if I go to the client’s location, help fix a crashed accounts-receivable database and never print a financial statement, that is not presenting. The problem situations will fall somewhere between these two examples. I think the committee expects practitioners to use their professional judgment, but the membership may, at some point, insist on a checklist.”
Diane S. Conant, CPA, chairwoman of the committee said, “The committee believes the modified definition of submission will solve many of the applicability problems practitioners are facing. It recognizes changes in the way we serve our clients in today’s technological environment while still maintaining a minimum level of service for financial statements we prepare.”
When accountants perform compilation engagements in which the financial statements are not expected to be used by a third party, SSARS no. 8 allows them to employ either of the following methods to communicate with the client:
Issue a compilation report in accordance with the reporting requirements of SSARS no. 1.
Document an understanding with the entity through the use of an engagement letter, preferably signed by its management, regarding the specific services to be performed and the limitations on the use of those financial statements.
Zollars is concerned that accountants may misinterpret SSARS no. 8’s definition of a third party, which is expressed in exclusionary terms: “all parties except for members of management who are knowledgeable about the nature of the procedures applied and the basis of accounting and assumptions used in the preparation of the financial statements.”
“The problem,” he said, “is that many people whom CPAs might not regard as third parties actually are. For example, managers who have inadequate knowledge of accounting are third parties.”
Conant said, that the committee “chose to use a definition by exception because its members believe most parties will fall into the third party category.” Concerning the definition’s reference to managers’ knowledge of accounting, she said, “In order to use the special nonreporting option created by SSARS no. 8, members of management should have the necessary knowledge of the business and the financial information in order to put it in the proper context.”
SSARS no. 8 is effective for financial statements submitted after December 31, 2000.
To assist practitioners in implementing SSARS no. 8, the AICPA issued a Compilation and Review Alert, Practical Guidance for Implementing SSARS No. 8 (product code 022274), which can be obtained by calling 888-777-7077.