Accountants in public practice who prepare financial statements for clients will find significant changes in new standards for accounting and review services that were issued in October.
Statement on Standards for Accounting and Review Services (SSARS) No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification, is the result of efforts by the AICPA Accounting and Review Services Committee (ARSC) to clarify and revise the standards for reviews, compilations, and engagements to prepare financial statements.
Click here to read the standard.
The basic standard for accountants who prepare and present financial statements to their clients or to third parties was issued as SSARS No. 1, Compilation and Review of Financial Statements, in December 1978. Paragraph 7 of SSARS No. 1 stated that “the accountant should not submit unaudited financial statements of a nonpublic entity to his client or others unless, as a minimum, he complies with the provisions of this statement applicable to a compilation engagement.” The SSARS defined “submission” as “presenting to management financial statements that the accountant has prepared.” The bottom line is that accountants in public practice who prepared financial statements were required to, at a minimum, perform a compilation engagement with respect to those financial statements.
Submission worked well as a trigger for the compilation service when SSARS No. 1 was issued. At that time, paper financial statements were prepared, bound, and presented to clients by the CPA. However, in today’s electronic environment, financial data are typically recorded and organized across multiple computer platforms, including some in the cloud. The use of computer software by the client and by the CPA makes it difficult to determine who (or what) has prepared the financial statements and thus whether the accountant is required to perform a compilation engagement.
For example, take a situation where an accountant performs bookkeeping services for a client. Perhaps the accountant has access to the client’s cloud-computing system and makes a number of journal entries to record payroll tax payments, sales tax payments, depreciation expense, and revenue adjustments for a given period. The company’s internal bookkeeper records amounts billed and certain recurring expenses such as utilities and office expenses. At the end of each month, the bookkeeper prints, from the cloud accounting software, a copy of the financial statements for presentation to the owner. Has the accountant prepared those financial statements? The bookkeeper? The application itself? The answer is difficult to determine, and often accountants will come to different conclusions given the same set of circumstances. This diversity in practice is not in the public interest.
SSARS No. 21 eliminates the need for the accountant to determine an answer to that question by eliminating the submission requirement and making the compilation literature apply when the accountant is engaged to perform a compilation service.
Prior standards are superseded
SSARS No. 21 supersedes all existing AR sections with the exception of AR Section 120, Compilation of Pro Forma Financial Information. Proposed standards regarding compilation of pro forma information and compilation of prospective financial information are expected to be exposed for public comment in 2015.
Format of SSARS No. 21
SSARS No. 21 is formatted into four sections:
- Section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services.
- Section 70, Preparation of Financial Statements.
- Section 80, Compilation Engagements.
- Section 90, Review of Financial Statements.
These sections will be codified with the prefix “AR-C” to distinguish them from the extant AR sections.
Section 60 of SSARS No. 21 replaces AR Section 60, Framework for Performing and Reporting on Compilation and Review Engagements, and provides general principles for engagements performed in accordance with SSARSs. Section 60 is intended to help accountants better understand their professional responsibilities when performing an engagement in accordance with SSARSs.
An accountant engaged to perform a review, a compilation, or an engagement to prepare financial statements is required to adhere to the requirements in Section 60 as well as the requirements in the appropriate engagement section.
Section 60 includes requirements and guidance with respect to:
- Ethical requirements.
- Professional judgment.
- Conduct of the engagement in accordance with SSARSs.
- Engagement-level quality control.
- Acceptance and continuance of client relationships and engagements.
Requirement to obtain a signed engagement letter
The accountant is required to agree upon the terms of the engagement for all SSARSs engagements with management or those charged with governance, as appropriate. The agreed-upon terms of the engagement are required to be documented in an engagement letter or other suitable form of written agreement. The engagement letter or other suitable form of written agreement is required to be signed by the accountant or the accountant’s firm and management or those charged with governance. The requirement that management sign the engagement letter is to better ensure that management has read the letter and understands the terms of the engagement.
Section 70 of SSARS No. 21 is intended to be short (only 22 requirement paragraphs and 19 application paragraphs) and easy to apply for accountants who are engaged to prepare financial statements for their clients without reporting on those statements. The section is particularly helpful for accountants who prepare interim financial statements and perform accounting services using a cloud-computing application. Also, accountants who currently prepare financial statements that are not expected to be used by a third party (commonly referred to as management-use-only financial statements or SSARS 8 financial statements) should find that an engagement to prepare financial statements in accordance with Section 70 now is better suited to their clients’ needs.
Section 70 applies when an accountant in public practice is engaged to prepare financial statements. It does not apply when the accountant is engaged to perform an audit, review, or compilation of those financial statements that the accountant prepared. Even when Section 70 does not apply to the preparation of financial statements because the accountant is engaged to perform an audit, review, or compilation, Ethics Interpretation No. 101-3, “Performance of Nonattest Services,” would still apply since the preparation of—or assisting in the preparation of—financial statements is a nonattest service. The section also does not apply when the accountant has been engaged to merely assist in preparing financial statements or when the accountant prepares financial statements as a byproduct of another engagement, such as when the accountant prepares financial statements:
- Solely for submission to taxing authorities;
- For inclusion in written personal financial plans prepared by the accountant;
- In conjunction with litigation services that involve pending or threatened legal or regulatory proceedings; or
- In conjunction with business valuation services.
The accountant is required to apply professional judgment in determining whether he or she is engaged to prepare financial statements. The accountant will need to have a discussion with the client to determine the client’s specific needs, including whether the client expects the accountant to prepare financial statements as part of the engagement—either for internal or external use.
Click here for additional guidance on when Section 70 applies.
Because the engagement to prepare financial statements is a nonattest service, the accountant is not required to make a determination as to whether he or she is independent of the entity.
The accountant may prepare financial statements that omit substantially all disclosures required by the applicable financial reporting framework. In such instances, the accountant is required to disclose such an omission in the financial statements. The disclosure of the omission of substantially all disclosures required by the applicable financial reporting framework may be made on the financial statements or in a selected note to the financial statements (see Exhibit 1).
The accountant may prepare financial statements that include disclosures about only a few matters in the notes to the financial statements. Such disclosures may be labeled “Selected Information—Substantially All Disclosures Required by [the applicable financial reporting framework] Are Not Included.”
The accountant is precluded from preparing financial statements that omit substantially all disclosures if the omission was undertaken with the intent of misleading users of such financial statements (see Exhibit 1).
If the accountant becomes aware that the financial statements include a departure or departures from the applicable financial reporting framework, he or she is required to either correct the departure or, after discussions with management, disclose the material misstatement or misstatements in the financial statements. The disclosure of the material misstatement or misstatements may be made on the face of the financial statements or in a note to the financial statements.
When SSARS No. 1 was issued, the requirement that the accountant report on financial statements that the accountant submitted to a client or to third parties was included because users should be able to readily identify the degree of responsibility the accountant is taking with respect to such financial statements. To ensure that users can readily identify that the accountant is not providing any assurance on the financial statements, the accountant is required to include a statement on each page of the financial statements indicating, at a minimum, that “no assurance is provided” on the financial statements. The accountant’s name is not required to be included in the statement (see Exhibit 2). Vendors are already working to include the legend in their accounting software.
If the accountant is unable to include a statement on each page of the financial statements, he or she is required to do one of two things:
Issue a disclaimer that makes clear that no assurance is provided on the financial statements; or
Perform a compilation engagement in accordance with Section 80 of SSARS No. 21.
See Exhibit 3 for an example of a disclaimer that an accountant may issue.
When preparing financial statements in accordance with a special-purpose framework (also commonly referred to as an other comprehensive basis of accounting, or OCBOA), the accountant is required to include a description of the financial reporting framework on the face of the financial statements or in a note to the financial statements. A description of the special-purpose framework is usually placed next to or under the title of the financial statements. For example, “Statement of Assets and Liabilities—Modified Cash Basis.”
It is not expected that accountants will find the implementation of Section 70 to be a significant challenge. However, since the section can be implemented early, accountants need to make sure that they understand the full text of the new section and have a thorough discussion with their clients to ensure that both the accountant and the client understand what the client needs and what service the accountant will provide—including whether the accountant’s service will result in the issuance of a report.
Like Section 70, Section 80 of SSARS No. 21 is intended to be short (38 requirement paragraphs and 43 application paragraphs) and easy to apply for accountants. Section 80 applies when the accountant is engaged to perform a compilation engagement. This contrasts with prior compilation standards, which applied when the accountant submitted (defined as “prepared and presented”) financial statements to a client or to third parties.
Other than the applicability of the literature, the compilation standard is largely unchanged from previous standards. The accountant’s objective in a compilation engagement is to apply accounting and financial reporting expertise to assist management in the presentation of financial statements and report in accordance with Section 80 without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework.
Section 80 retains the requirement that the accountant determine whether he or she is independent of the entity. The accountant can still perform a compilation engagement on financial statements that omit substantially all disclosures.
The primary change in the literature relates to reporting on financial statements that have been subjected to a compilation engagement. First of all, a report is now required for all compilation engagements. The nonreporting exception that previously applied when financial statements that were prepared and presented by an accountant to management were not intended for third-party use is no longer necessary because such engagements would be covered by Section 70. Also, to differentiate a report in which the accountant provides no assurance from assurance reports (i.e., review and audit reports), the report is streamlined. The standard report is just one paragraph with no headings. Additional paragraphs would be added when the financial statements are prepared in accordance with an OCBOA; when management elects to omit substantially all disclosures required by the applicable financial reporting framework; when the accountant’s independence is impaired; when there is a known departure from the applicable financial reporting framework; and when supplementary information accompanies the financial statements and the accountant’s compilation report. See Exhibit 4 for a comparison of the standard compilation report in accordance with Section 80 to the previous standard compilation report.
See Exhibit 5 for differences between a compilation engagement and an engagement to prepare financial statements in accordance with SSARS No. 21. The bottom line is that SSARS No. 21 provides a bright line between accounting services (preparation) and reporting services (compilation or review). The accountant no longer has to be concerned about whether the financial statements will be used only by management or by third parties.
Section 90 of SSARS No. 21 is primarily a clarity redraft of the extant review literature with very few changes.
SSARS No. 21 does make clear that Section 90 may be applied to historical financial information other than historical financial statements, such as specified elements, accounts, or items of a financial statement; supplementary information; required supplementary information; and financial information included in a tax return.
The accountant’s review report will look different as SSARS No. 21 requires the use of headings in the accountant’s review report. The accountant is also required to name the city and state of the issuing office. The requirement will be met if the accountant’s review report is presented on the accountant’s letterhead and the letterhead contains the city and state of the issuing office.
Effective date of SSARS No. 21
ARSC is allowing early implementation for SSARS No. 21, with a required effective date a year out to allow for education and training for those in practice who need more time. SSARS No. 21 is effective for reviews, compilations, and engagements to prepare financial statements for periods ending on or after Dec. 15, 2015.
Accountants should be aware that early implementation has drawbacks as well as benefits. Accountants should ensure that staff is appropriately trained and that firm methodologies are updated before the implementation of any new standard.
Other SSARS No. 21 guidance
ARSC discussed many issues in the deliberations of SSARS No. 21. It was concerned about the length of the standard for a straightforward, no-assurance compilation or engagement to prepare financial statements. ARSC decided to try to keep the standards and application paragraphs short and put much of the application guidance in an authoritative interpretive guide.
That interpretive guidance is expected to be available during the second quarter of 2015.
SSARS No. 21 Results From Years of Professionwide Collaboration
by Michael P. Glynn, CPA, CGMA
Statement on Standards for Accounting and Review Services (SSARS) No. 21 was issued by the AICPA Accounting and Review Services Committee (ARSC) in October, but it took years to develop with the consideration of extensive comments from stakeholders in the accounting profession. ARSC consists of seven volunteer members, all of whom are in public practice, are with smaller or regional firms, and perform SSARSs engagements regularly.
ARSC is the senior committee of the AICPA that is designated by AICPA Council to issue standards with respect to unaudited financial statements or other unaudited financial information of a nonpublic entity. The “Compliance With Standards Rule” of the AICPA’s Code of Professional Conduct requires members who perform professional services to comply with standards promulgated by bodies designated by Council.
The project was undertaken because:
- The applicability of the compilation standard was based on a trigger of submission that was no longer practical in today’s electronic environment. Therefore, ARSC sought to create an engagement-driven standard that would be applicable in the same way as the review and auditing standards. In other words, it would apply when a CPA was engaged to perform a compilation service.
- The AICPA Auditing Standards Board (ASB), as part of its project to clarify the literature for audit engagements, had deleted the association section from the auditing literature and had asked ARSC to consider including it in SSARSs since it dealt with unaudited financial statements.
- ARSC was committed to take a look at whether the review standard should be amended in light of a new international review standard.
- ARSC was committed to clarifying the SSARSs literature in a manner similar to that used by the ASB in clarifying the auditing standards.
Based on comments from stakeholders, ARSC in January 2013 withdrew its initial exposure drafts from June 2012. Commenters had told ARSC that the compilation service should be positioned as a nonattest service consistent with the positioning of preparation of financial statements. They also said the standards needed to be combined and simplified.
ARSC later paved the way forward for SSARS No. 21 with a proposal that the accountant would be required to comply with the compilation SSARS when the accountant is engaged to perform a compilation engagement—as opposed to when the accountant submits (defined as “prepares and presents”) financial statements to a client or to third parties.
The standard was created with the help of substantial comments from a wide range of parties. Ninety-two respondents submitted comments on the initial exposure draft, and 62 comment letters—the overwhelming majority of which were supportive—were received on the reproposed standards.
ARSC and the AICPA thank all of the members, firms, state societies, state boards, and other organizations that provided input. Special thanks are due to the National Conference of CPA Practitioners, CAMICO, the AICPA Technical Issues Committee, and the National Association of State Boards of Accountancy for their assistance and perspectives with respect to the issues addressed by SSARS No. 21.
For more information on how SSARS No. 21 was developed, click here.
Clarified, revised standards for reviews, compilations, and engagements to prepare financial statements have been issued by the AICPA Accounting and Review Services Committee in SSARS No. 21.
The new standards make the compilation literature apply when the accountant is engaged to perform a compilation service. This eliminates the submission requirement that was contained in the previous compilation standard and had become a source of confusion and diversity in practice.
SSARS No. 21 creates a bright line between accounting services (preparation) and reporting services (compilation or review). A report is now required for all compilation engagements, and the standard report is just one paragraph with no headings.
Michael L. Brand (email@example.com) chairs the AICPA Accounting and Review Services Committee (ARSC) and is partner in charge of audit, attest, and quality control at Johnson, Feigley, Newton & Brand LLP in Athens, Ala. Michael P. Glynn (firstname.lastname@example.org) is a senior technical manager with the AICPA Auditing and Attest Standards team and is staff liaison to ARSC. Charles J. McElroy (email@example.com) served as chair of ARSC’s Clarity Task Force for the SSARS 21 project and is chief quality officer at CliftonLarsonAllen LLP.
To comment on this article or to suggest an idea for another article, contact Ken Tysiac, editorial director, at firstname.lastname@example.org or 919-402-2112.
- “A Makeover for Compilations,” Jan. 2014, page 12
- “Compilation Reports for Valuation Engagements?” May 2012, page 52
- “Changes on Tap for Compilation and Review Standards,” May 2010, page 32
- Developments in Review, Compilation, and Financial Statement Preparation Engagements: Engagements Performed in Accordance With SSARSs—AICPA Alert (#ARACRV14P, paperback; #ARACRV14E, ebook; #ARACRVO, one-year online access)
- SSARS No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification (#ASSARSST21P, paperback)
Compilation, Review, and Accounting Service Update (audio webcasts: #VCL4COMP021, Dec. 16; #VCL4COMP022, Jan. 21)
“Understanding the SSARS 21 Clarification and Revision” web event rebroadcasts (#WBC14273I, Dec. 4; #WBC14274I, Dec. 17)
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