Proposed revisions clarify responsibilities for preparers

In accordance with recently proposed revisions to professional standards, CPAs who prepare financial statements for clients would consider that a nonattest bookkeeping service and would no longer be required to perform a compilation service with respect to those financial statements unless engaged to do so.

The changes, proposed in June by two AICPA committees, would require CPAs who prepare financial statements, but are not engaged to perform a compilation, review, or audit, to request that management include a label or notation that makes clear that the financial statements were not compiled, reviewed, or audited. Alternatively, CPAs can attach a disclaimer to the financial statements to indicate when they have not been compiled, reviewed, or audited.

It is anticipated that the proposed changes would have minimal impact on CPAs who prepare financial statements for their clients, except with regard to the requirements to perform a compilation service, which will undergo significant revision under the proposal.

In accordance with current rules, a CPA who prepares and presents financial statements to a client or third party must also perform the compilation service, whether or not the client has engaged the CPA for the compilation.

The proposed standard would dictate that CPAs who prepare financial statements would perform a compilation only if they are engaged by their client to do so. The compilation would be a “read and report” service separate from the preparation. Once engaged to perform a compilation service, the CPA would read the financial statements to see if there are obvious mistakes or flaws, and then issue an accountant’s compilation report on the financial statements.

This change is contained in a proposed Statement on Standards for Accounting and Review Services (SSARS) exposed for public comment by the AICPA Accounting and Review Services Committee (ARSC). ARSC has also exposed for public comment a proposed standard that addresses the accountant’s association with financial statements that the accountant has not compiled, reviewed, or audited.

The proposal that would make preparing financial statements and performing certain bookkeeping services nonattest services is contained in an exposure draft issued June 29 by the AICPA Professional Ethics Executive Committee (PEEC), the technical committee charged with interpreting and enforcing the AICPA Code of Professional Conduct. The nonattest services would be subject to the provisions of an AICPA professional standard on independence. The standard is Interpretation No. 101-3, “Performance of Nonattest Services,” under Rule 101, Independence (AICPA, Professional Standards, ET sec. 101 par. 05).

This proposed change would harmonize the ethical standards with the views of some practitioners who already consider the financial statement preparation to be a nonattest bookkeeping service. The proposal also would conform the standards to the revised independence standard issued in August 2011 by the U.S. Government Accountability Office (GAO), which indicates that financial statement preparation is not part of the audit service.

Specifically, the GAO’s revised standard includes a provision stating that nonattest services, such as preparation of financial statements, cash-to-accrual conversions, and reconciliations, would be considered nonattest services, not routine services related to the performance of an audit. This standard is inconsistent with a nonauthoritative frequently asked question (FAQ) published by the Professional Ethics Division.

In this FAQ, the division took the position that preparing financial statements as part of an attest engagement would not be considered a nonattest service, provided the client’s records are substantially complete and current in order to conduct the attest engagement on those books and records. The FAQ further stated that if the member performed a service to bring those books and records current or complete, the service would be considered outside the scope of the normal attest engagement and, therefore, a bookkeeping service subject to the requirements of Interpretation No. 101-3.

PEEC reconsidered the position taken in the FAQ and agreed to conform to the GAO position.

Interpretation No. 101-3 has been under review since November 2009, when PEEC learned of confusion and diversity in practice related to a provision within the interpretation that concluded independence would be impaired if a member established or maintained internal controls for a client. PEEC was advised that some members believed this provision prohibited certain activities for an attest client, such as preparing financial statements or reconciling accounts, because under the Committee of Sponsoring Organizations of the Treadway Commission’s Internal Control—Integrated Framework, such activities could be viewed as part of the system of internal control over financial reporting.

This belief conflicted with PEEC’s intention on how the provision governing establishing or maintaining internal controls should be applied. PEEC intended that the establishing-or-maintaining-of-internal-controls provision should apply to situations whereby the member, in effect, manages the internal audit activities of the client or situations when the member accepts responsibility for designing, implementing, or maintaining internal controls for his or her clients. PEEC believed its intention was supported by the fact that 101-3 provides that independence can be maintained when CPAs assist clients with performing bookkeeping services, including financial statement preparation, and reconciling a client bank account when certain safeguards are in place.

At its meeting in May, PEEC approved two sets of revisions to 101-3. One set of revisions was previously exposed for comment and will take effect on Aug. 31, 2012. The second set of revisions appears in an omnibus ED from the Professional Ethics Division dated June 29, 2012. The revisions that are effective Aug. 31 include clarification that independence would be impaired if members accept responsibility for designing, implementing, or maintaining controls for a client but would not impair independence if members perform certain nonattest services, including bookkeeping services such as preparation of financial statements or preparing account reconciliations, provided certain safeguards are in place.

IMPACT ON THE AUDITING, REVIEW, AND COMPILATION STANDARDS

Current auditing, review, and compilation standards permit the CPA to prepare or draft financial statements, in whole or part, as part of the attest engagement:

• Auditing standards (paragraph .03 of AU section 110, Responsibilities and Functions of the Independent Auditor [AICPA, Professional Standards]) state that the independent auditor may make suggestions about the form or content of the financial statements or draft them, in whole or in part, based on the information from management during the performance of the audit.
• Review standards are silent with respect to preparation of financial statements, but it is understood that accountants often prepare financial statements as part of a typical review engagement.
• Compilation standards (paragraph .01 of AR section 80, Compilation of Financial Statements [AICPA, Professional Standards]) state that the accountant is required to comply with the provisions of AR section 80 whenever he or she is engaged to report on compiled financial statements or submits financial statements to a client or third parties. Paragraph .04 of AR section 60, Framework for Performing and Reporting on Compilation and Review Engagements (AICPA, Professional Standards), defines submission of financial statements as presenting to management financial statements the accountant has prepared.

Because any financial statement preparation or drafting would be considered a nonattest service under the PEEC proposal, clarifications to these standards will be necessary. The audit and review standards can be easily clarified by including a footnote or other language that states that the provisions of 101-3 apply when the auditor or accountant prepares financial statements. But the compilation standards will require more extensive revision, which is addressed in the proposed SSARS exposed by ARSC.

As a result of the PEEC and ARSC revisions, an engagement to prepare financial statements would be a nonattest service and not subject to the compilation standard. To make clear the accountant’s responsibility when the accountant is engaged to prepare financial statements but is not engaged to perform a compilation engagement, ARSC has also exposed for public comment an additional proposed standard. That proposal addresses the accountant’s responsibilities when he or she is associated with financial statements that have not been compiled, reviewed, or audited. That proposed standard would require certain legends, notations, or disclaimer language be placed on or with the financial statements when the accountant prepares financial statements but has not compiled, reviewed, or audited the financial statements. This association standard is in response to a public interest concern that anyone using financial statements that have been prepared, in whole or part, by a CPA understands that those financial statements have been prepared without audit, review, or compilation.

The proposed association standard would be effective for unaudited financial statements with which the accountant is associated on or after Dec. 15, 2014. The proposed revisions to the compilation standard would be effective for compilations of financial statements for periods ending on or after Dec. 15, 2014.

The proposed effective date of the revisions to Interpretation No. 101-3 would be two years from the date when the revision is published in the JofA. Early implementation of the proposed revisions to 101-3 and the new SSARSs would be permitted so that accountants can implement the revised standards simultaneously.

STILL TIME TO COMMENT

The proposed, revised SSARSs can be downloaded from tinyurl.com/bo4o933. The proposed, revised Interpretation No. 101-3 can be downloaded from tinyurl.com/c9u3jar. The comment period for both EDs ends on Aug. 30. PEEC will consider comments received on the proposed revised Interpretation No. 101-3 at its meeting on Oct. 25–26, 2012. ARSC will consider comments received on the proposed revised SSARSs at its meeting on Nov. 13–15, 2012.

EXECUTIVE SUMMARY

Recently proposed revisions to professional standards would require CPAs who prepare financial statements for clients to consider that service a nonattest bookkeeping service. The CPAs would no longer be required to perform a compilation service with respect to those financial statements unless specifically engaged to do so. The proposed changes would consider all financial statement preparation to be a nonattest service, regardless of whether the accountant also is engaged to compile, review, or audit the financial statements.

CPAs who prepare financial statements would perform a compilation only if they are engaged by their client to do so in accordance with the proposed standard. The compilation would be a “read and report” service separate from the preparation of the financial statements. Once engaged to perform a compilation service, the CPA would read the financial statements to see if there are obvious mistakes or flaws, and then issue an accountant’s compilation report on the financial statements.

The changes proposed would harmonize the professional standards with the views of some practitioners who already consider the financial statement preparation to be a nonattest service, and would conform the standards to corresponding U.S. Government Accountability Office (GAO) literature.

Proposed changes include a standard addressing the accountant’s association with financial statements that he or she has not compiled, reviewed, or audited. The proposal would require CPAs who prepare financial statements, but are not engaged to perform a compilation, review, or audit engagement, to request that management include a label or notation that makes clear that the financial statements were not audited, reviewed, or compiled. Alternatively, CPAs can attach a disclaimer to the financial statements to indicate when they have not compiled, reviewed, or audited the financial statements.

The proposed changes are expected to have minimal impact on CPAs who prepare financial statements for their clients, except with regard to the requirement to perform a compilation service, which would be revised significantly under the proposal.

Mike Glynn (mglynn@aicpa.org) is a senior technical manager with the AICPA’s Audit and Attest Standards team and is staff liaison to the Institute’s Accounting and Review Services Committee. Ellen Goria (egoria@aicpa.org) is a senior manager for independence and special projects for the AICPA’s Professional Ethics Division.

To comment on this article or to suggest an idea for another article, contact Ken Tysiac, senior editor, at ktysiac@aicpa.org or 919-402-2112.

AICPA RESOURCES

Publications

• Compilation and Review Developments—Compilation and Review Alert 2011/12 (#0223011, paperback; #ARACRV11e, ebook)
• Independence and Ethics Developments—2011/12 Audit Risk Alert (#0224711, paperback; #ARAIET11e, ebook; #WIA-XX, online subscription)

CPE self-study

• Advanced Update for Compilation, Review and Accounting Services (#731558)
• Compilation and Review Engagement Essentials (#733883)
• Compilation, Review and Accounting Service Update (#733375)
• Professional Ethics: AICPA’s Comprehensive Course Text (#732315, text; #738396HS, CD-ROM)

For more information or to make a purchase, go to cpa2biz.com or call the Institute at 888-777-7077.