A makeover for compilations
New standards also proposed on preparation and association with financial statements.
Three proposed standards were exposed for public comment by the AICPA Accounting and Review Services Committee (ARSC) on Oct. 23.
The proposed standards are as follows:
– A proposed, revised compilation standard that would provide requirements and guidance to an accountant when engaged to perform a compilation engagement on historical financial statements.
– A new preparation standard that would provide requirements and guidance when an accountant is engaged to prepare financial statements for a client but has not been engaged to perform a compilation, review, or audit with respect to those financial statements.
– A new association standard that would provide requirements and guidance when an accountant agrees to permit the use of his or her name in a report, document, or written communication that also includes financial statements with respect to which the accountant did not issue a compilation, review, or audit report. The accountant may or may not have prepared the financial statements.
Comments on the proposed standards, which are written in clarity format, are requested by May 2. Comments should be addressed to Mike Glynn, CPA, at mglynn@aicpa.org. The entire proposal is available at tinyurl.com/0794byc.
The proposed revised compilation standard would modify the applicability of the compilation literature. Currently, AR Section 80, Compilation of Financial Statements, applies when an accountant is engaged to report on compiled financial statements or submits financial statements to the client or to third parties. Submission is defined as “prepares and presents.” Whereas submission worked well as a trigger for the compilation service when Statement on Standards for Accounting and Review Services (SSARS) No. 1, Compilation and Review of Financial Statements, was issued in December 1978, cloud computing and other applications have made it difficult to determine who (or what) has prepared the financial statements.
A good example is a situation where an accountant performs bookkeeping services for a client. The accountant has access to the client’s cloud-computing system and makes a few journal entries to record payroll tax payments, sales tax payments, and depreciation expenses for a given period. The company’s internal bookkeeper records certain recurring expenses such as utilities and office expenses. At the end of each month, the bookkeeper prints out a copy of the financial statements for presentation to the board of directors. Did the accountant prepare those financial statements? Did the bookkeeper? Or was it the application itself?
ARSC’s proposal would eliminate the need for the accountant to answer that difficult question by eliminating the submission requirement and making the compilation literature apply when the accountant is engaged to perform a compilation service.
Because the accountant would follow the compilation standard when engaged, the accountant would always be required to issue a compilation report. However, to differentiate the nonassurance compilation report from assurance (review and audit) reports, ARSC has proposed to streamline the report so that the standard report is just one paragraph with no headings. The proposed standard would retain the existing requirement that the accountant modify the compilation report whenever his or her independence is impaired. The accountant would be required to obtain an engagement letter signed by the accountant and the client’s management. The proposed standard can be applied to financial statements with or without disclosures.
The proposed preparation standard would apply when the accountant is engaged to prepare financial statements but is not engaged to perform an audit, review, or compilation on those financial statements. A report would not be required—even when financial statements are expected to be used by or presented to a third party. Instead, the accountant would be required to include a legend on each page of the financial statements stating that no assurance is being provided.
The proposed SSARS would require that the accountant obtain an engagement letter signed by both the accountant and the client’s management. Like all other bookkeeping/accounting services engagements, the accountant would not be required to consider whether he or she is independent. The proposed standard can be applied to financial statements with or without disclosures.
The proposed compilation and preparation SSARSs would result in a bright line between accounting (preparation) and reporting (compilation) services (see Exhibit 1). The accountant would not have to be concerned with whether the financial statements would be used internally or would be used by third parties (including boards of directors).
The proposed association standard is essentially the same as AU Section 504, Association With Financial Statements. The requirements and guidance with respect to association with unaudited financial statements is being moved to the SSARSs so that the auditing literature deals only with audit matters. The proposed standard applies when the accountant permits the use of his or her name in a report, document, or written communication containing financial statements on which the accountant has not issued an audit, review, or compilation report. In those cases, the accountant would be required to read the financial statements to see if there are any obvious material misstatements.
Mike Glynn (mglynn@aicpa.org) is a senior technical manager with the AICPA Auditing and Attest Standards Team. He is the staff liaison to the AICPA Accounting and Review Services Committee.
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.
