Standards revised for reviews, compilations, engagements to prepare financial statements

Clarified and revised standards for compilations and engagements to prepare financial statements released Thursday create a bright line between accounting (preparation) and reporting (compilation) services.

The AICPA Accounting and Review Services Committee (ARSC) released Statement on Standards for Accounting and Review Services (SSARS) No. 21, which contains significant changes for accountants in public practice who prepare financial statements for clients.

SSARS No. 21, which represents one of the most significant revisions to nonaudit standards for CPAs in the last 35 years, affects:

• Engagements in which CPAs prepare financial statements for clients.
• Compilation engagements, in which CPAs assist management in presenting information in the form of financial statements without obtaining or providing assurance on that information.
• Review engagements, in which CPAs obtain limited assurance as a basis for reporting whether the accountant is aware of any material modifications that should be made to the financial statements for them to be in accordance with the applicable financial reporting framework, primarily through the performance of inquiry and analytical procedures.

The new standards are designed to be a better fit for the current electronic and cloud-based practice environment. ARSC Chairman Michael Brand, CPA, CGMA, said in a news release that when accountants prepared and mailed or handed paper financial statements to their clients, it made sense for CPAs, at a minimum, to issue compilation reports on those financial statements.

Brand said that in today’s electronic environment, it’s impossible to determine who prepared financial statements because clients and CPAs often work together on the accounting, sometimes in real time using cloud applications.

SSARS No. 21 makes the compilation rules apply when the accountant is engaged to perform a compilation service. The new standard eliminates a requirement from previous standards dating to 1978 that required accountants in public practice who prepared financial statements to, at a minimum, perform a compilation engagement with respect to any financial statements they presented to management or to third parties.

In recent years, the question of who has prepared financial statements has become more difficult to answer due to the expanded use of technology such as cloud computing. By eliminating the submission requirement, SSARS No. 21 eliminates the need for accountants to use professional judgment to determine whether they have prepared financial statements. The potential for diversity in practice also is eliminated.

SSARS No. 21 includes:

Section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services, which includes the general principles for engagements performed in accordance with SSARSs. It replaces AR Section 60, Framework for Performing and Reporting on Compilation and Review Engagements.

Section 70, Preparation of Financial Statements, which applies when the accountant is engaged to prepare financial statements but is not engaged to perform an audit, review, or compilation on those financial statements. The accountant is required to include a legend on each page of the financial statements stating that no assurance is being provided.

The accountant is required to obtain an engagement letter signed by both the accountant and the client’s management. Like all other nonattest bookkeeping/accounting services engagements, the accountant is not required to consider whether he or she is independent. The standard can be applied to financial statements with or without disclosures.

Section 80, Compilation Engagements, which provides requirements and guidance when an accountant is engaged to perform a compilation on historical financial statements. Previously, AR Section 80, Compilation of Financial Statements, applied when an accountant was engaged to issue a compilation report on financial statements or submitted financial statements to the client or to third parties.

The performance requirements for compilation engagements are largely unchanged. A report is always required (non-reporting management-use-only engagements would be covered by the preparation standard). To differentiate the nonassurance compilation report from assurance (review and audit) reports, the report is streamlined so that the standard report is just one paragraph with no headings.

The requirement that the accountant modify the accountant’s compilation report whenever the accountant’s independence is impaired is retained. The accountant is required to obtain an engagement letter signed by both the accountant and the client’s management. The standard can be applied to financial statements with or without disclosures.

Section 90, Review of Financial Statements. The standards for review engagements are basically a clarity redraft of the review literature with few changes to SSARS No. 19.

All existing AR sections with the exception of AR Section 120, Compilation of Pro Forma Financial Information, are superseded by SSARS No. 21. AR Section 120 is expected to be clarified and exposed for public comment in 2015, along with proposed requirements and guidance related to the compilation of prospective financial information.

SSARS No. 21 takes effect for engagements on financial statements for periods ending on or after Dec. 15, 2015. Early implementation is permitted. Smaller firms may find it productive to adopt early and benefit from some of the efficiencies that may be realized by performing an engagement to prepare financial statements in accordance with Section 70.

But while the standard allows for early implementation on an engagement-by-engagement basis, larger firms’ quality-control systems often are set to implement at the effective date or on a firmwide basis after training, standard engagement letters, and other engagement programs and tools are completed.

The effective date is designed to give time for education and training while providing flexibility for quick transition to more efficient practices by firms that are in position to adopt early.

More information on the project is available on a new webpage devoted to SSARS No. 21 on the AICPA site. The standards will be described in detail during a video webcast from 2 to 4 p.m. EST on Friday, Nov. 7.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.