Bookkeeping or preparation service? That is the question

The issuance of a new standard in October 2014 has resulted in questions to the AICPA Center for Plain English Accounting (CPEA) regarding whether an accountant who performs bookkeeping services for clients is engaged to prepare financial statements.

Accountants who are engaged to prepare financial statements for clients are required to adhere to the guidance issued in Statement on Standards for Accounting and Review Services (SSARS) No. 21, Clarification and Recodification (see “A Bright Line in SSARSs,” JofA, Dec. 2014, page 32). Among other things, SSARS No. 21 provides requirements and guidance for accountants who are engaged to prepare financial statements—but are not engaged to perform an audit, review, or compilation of those financial statements. Accountants who perform bookkeeping services have asked when the standard applies to those engagements. The CPEA provides some considerations for accountants who face this issue.

Many CPEA members have begun asking whether a client engagement falls under AR-C Section 70, Preparation of Financial Statements, of SSARS No. 21. It is important to note that Section 70 of SSARS No. 21 does not apply unless the accountant is engaged to prepare financial statements. The key here is for the accountant to have an understanding with the client related to what the accountant is hired to do—and also what the engagement will not include. There is no “tripping into” a preparation service—it is a very bright line in that the accountant is required to comply with the SSARSs only if he or she is engaged to prepare financial statements. Therefore, it is important that the accountant and the client understand whether the engagement is to include the preparation of financial statements. However, some additional considerations may help when making this determination with your clients.

If the accountant is merely engaged to assist the client in preparing financial statements (e.g., the accountant is engaged to just prepare journal entries and perhaps post to the client’s cloud-computing application, or just to prepare certain note disclosures), then the accountant is engaged to provide accounting or bookkeeping services, and Section 70 of SSARS No. 21 does not apply. However, if the client’s understanding is that the accountant will then prepare the financial statements based on those inputs, then Section 70 of SSARS No. 21 would apply.

If the accountant is providing bookkeeping or accounting services to a client and uses the accounting software to generate financial statements, the SSARSs may apply. The SSARSs apply only when the accountant is engaged (i.e., hired) to prepare financial statements, so if the understanding with the client is that the accountant is to provide certain bookkeeping services but that the financial statements are to be prepared by the accounting software, then the SSARSs would not apply. In those instances, it is advisable to include language in the engagement letter that clearly indicates the engagement does not include the preparation of financial statements.

Although he or she is not required to do so, the accountant also may wish to consider the intended users of the financial statements, especially if the financial statements previously have been provided to third parties (e.g., a bank). If the accountant is aware that the client will provide financial statements to a third party and assert that the accountant prepared (or is otherwise associated with) the financial statements, the accountant may, as part of the process of reaching an understanding with the client as to the services to be provided, make clear that either:

• The accountant is preparing the financial statements, or
• The client should not make any assertions regarding the accountant’s association with the financial statements.

If the accountant is engaged to prepare the financial statements, one of the benefits of SSARS No. 21 is the requirement that a legend be included on each page of the financial statements (including any note disclosures) that clearly indicates that “no assurance is provided” on the financial statements. This reduces the risk that a third-party user would take an inappropriate level of comfort from the accountant’s association with the financial statements.

Establishing an understanding with your client before beginning any work on an engagement is of the highest importance. As accountants, we should educate our clients on the services that we can provide so that the client has a proper understanding of what the accountant believes he or she is hired to do and the expected outcome of the engagement work (e.g., the legend that would be included on each page of the financial statements in a preparation engagement).

About the author

Kristy Illuzzi (killuzzi@aicpa.org) is a senior technical manager with the AICPA Center for Plain English Accounting, the Institute’s national auditing and accounting resource center.

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

Editor’s note

This feature was prepared by the AICPA Center for Plain English Accounting (CPEA).