Plain Speaking on Plain Paper
I am writing in response to SSARS Hearing Yields No New Answers (JofA, Nov.97), which discusses the results of the two-day hearing conducted by the accounting and review services committee. According to the article, the consensus was that the compilation standards we have been using since the late 1970s are suddenly so onerous that they need to be revised, if not scrapped completely.
The inadvertent compilation is described as the key part of the problem: A CPA posts journal entries and the computer automatically generates a financial statement. The CPA then attaches a compilation report and issues the financial statement to the client, even though neither the CPA nor the client wants the financial statement to be issued.
The CPA is apparently powerless to stop the issuance of this unwanted financial statement. I fail to understand why the unwanted papers cannot simply be thrown in the trash. If the unwanted financial statements have a balance sheet that does not balance or an operating statement in which the cost of goods sold is 25 times the amount of sales, would the CPA be forced to issue the financial statement anyway? If the CPA was to be presented with an inadvertent tax return, which neither the CPA nor the client wanted, would he or she sign it and give it to a client so it could be filed with the Internal Revenue Service? Would the CPA attempt to bill the client for the unwanted tax return?
Professional standards are not intended to answer every problem; many problems require the CPA to use his or her professional judgment to find a solution. Have we gotten to the point that CPAs do not have enough professional judgment (or any other type of judgment) to resolve a problem such as an inadvertent compilation, short of a massive rewriting of professional standards?
The thought of shirking all responsibilities regarding financial statements sounds easy. Just claim that the CPA and the client know what they are doing and no reporting is necessary. The new standards (or lack thereof) could then be expanded to include the clients banker, the clients lender and other investors who also know what they are doing. This is, of course, forgetting that the reason the compilation report came into being was because juries in professional liability cases could not understand that the term unaudited meant that the financial statements had not been audited. I can only imagine what a jury would decide if there were no standards whatsoever.
This issue has come to the forefront in the past few years, coinciding with mandatory peer reviews. However, as the article indicates, there is no clear solution, which indicates that the standards are not broken. And you dont have to be a CPA to know that if it aint broke, dont fix it.
Gary J. Wood, CPA
By my count, of the 19 interested persons who spoke at the public hearing, 17 opposed so-called plain-paper financial statements and 2 speakers favored the idea. In addition, letters received by the American Institute of CPAs accounting and review services committee (ARSC) brought the count to 25 opposed and 3 in favor (89.3% opposed). The statistics are clear, precise and indisputable. Nevertheless, ARSC chairwoman Wanda Lorenz told the Journal , even though many may not like the proposed solutions, something needs fixing.
Lorenz continues, I fail to see how we are serving the public interest when we force our clients to accept a service they dont want. My firm submits dozens of compilation reports (pursuant to statements on standards for accounting and review services) and our clients like them, read them, accept them and pay for them.
Is Lorenzs dilemma professional or political? At the conclusion of the interview, she says, Unfortunately, the hearing didnt supply a lot of really snappy ideas. Here is a snappy idea: bury plain-paper financial statements in the cemetery of bad ideas; if there is no more space, then cremate it!
Eli Mason, CPA
New York City
Letters to the Editor
The Journal encourages readers to write letters on important professional issues in addition to comments on published articles. Because space is limited, letters submitted for publication should be no longer than 500 words. Please include telephone and fax numbers.
Editors Note: In October, ARSC withdrew the proposed SSARS, Assembly of Financial Statements for Internal Use Only , and concluded CPAs should not be permitted to issue plain-paper financial statements. See Plain Paper: Gone But Not Forgotten, JofA, Jan.98, page 17, for details.
Tax Software Buyers Guide (JofA, Sep.97) explains how the reviews were conducted: You used faculty and students at Brigham Young University. Your results would be more credible if the reviews had been performed by tax return preparers with real-world experience.
John S. Kirk, CPA
West Des Moines, Iowa