How SSARS No. 21 became a standard

It took years of deliberation and professionwide collaboration to produce Statement on Standards for Accounting and Review Services (SSARS) No. 21.

Here’s how the AICPA Accounting and Review Services Committee (ARSC) developed the standard, which was issued Oct. 23:

Initial exposure draft

On June 29, 2012, ARSC initially exposed for public comment a trio of proposed SSARSs: Association With Unaudited Financial Statements, Compilation of Financial Statements, and Compilation of Financial Statements—Special Considerations. The proposed SSARS Compilation of Financial Statements proposed to revise the applicability of the compilation literature so that the literature applied only when the accountant was engaged to perform a compilation service. The result would be that the accountant need no longer be concerned with issues such as who prepared the financial statements or whether the financial statements were intended to be used by third parties.

The proposed SSARS Association With Unaudited Financial Statements proposed to establish requirements and guidance when an accountant’s name was associated with unaudited financial statements. An accountant is associated with unaudited financial statements when he or she permits the use of his or her name in a client report, document, or written communication containing unaudited financial statements, or prepares, in whole or in part, financial statements even though the accountant did not report on the unaudited financial statements.

The purpose of the proposed SSARS was to effectively communicate the accountant’s responsibilities when the accountant is associated with financial statements on which the accountant had not performed a compilation, review, or audit. When the accountant is associated with unaudited financial statements because the accountant prepared such financial statements, in whole or in part, the proposed SSARS would have required that the accountant request that the entity clearly indicate that the financial statements were not compiled, reviewed, or audited.

Comments were requested to be received on the trio of proposed SSARSs by Aug. 31, 2012.

Issues from the exposure process

ARSC held a public meeting in Boston on Nov. 13–14, 2012. At that meeting, ARSC discussed the following issues raised during the exposure process with respect to association with unaudited financial statements and compilation engagements; however, final decisions were reserved until after ARSC’s consideration of all comment letters at its January 2013 meeting:

• Whether the compilation standard should remove any independence requirement, thereby making it clearly a nonattest service. ARSC also discussed establishing standards for other nonattest accounting services engagements. Such standards would include not only financial statement preparation but also bookkeeping and other accounting services. The debate around whether to remove the independence requirement was in-depth and considered many factors, including user perceptions of a compilation. ARSC considered that such a revision may be appropriate but only if the compilation report was revised so that it would not resemble an assurance report (e.g., an auditor’s report or an accountant’s review report). ARSC determined that the term “compilation” needed to be retained as it is included in various state laws and loan documents.
• Whether to require an engagement letter for a nonattest accounting services engagement. ARSC concluded that it should be required.
• If the accountant was associated with financial statements because the accountant prepared or assisted in preparing financial statements, whether the accountant’s name should be associated with the financial statements. ARSC concluded that as long as each page of the financial statements clearly indicated that the accountant had not audited or reviewed the financial statements, the accountant’s name need not be associated with the financial statements.
• Whether the accountant should have a nonreporting option when engaged to prepare financial statements. ARSC continued to believe that a nonreporting option was appropriate.

On Nov. 15, 2012, ARSC exposed for public comment two proposed SSARSs: Review of Financial Statements and Review of Financial Statements—Special Considerations. Comments were requested to be received on the proposed SSARSs by April 26, 2013.

Comments from 92 respondents

ARSC held a public meeting in Palm Springs, Calif., on Jan. 15–17, 2013. At that meeting, ARSC discussed the issues raised in the 92 comment letters received on the proposed SSARSs Association With Unaudited Financial Statements, Compilation of Financial Statements, and Compilation of Financial Statements—Special Considerations and considered proposed revisions to the proposed SSARSs as a result of the comments received.

Eleven commenters suggested that the compilation/preparation standard should be positioned as a nonattest service (meaning there should be no requirement to determine independence). By eliminating the requirement to determine independence, the standard would eliminate the requirement to disclose an independence impairment in the accountant’s report. ARSC debated whether that could potentially harm users but decided that since no assurance is obtained or expressly provided in a compilation, independence is not a key attribute of the service. ARSC pointed to past research that indicated that bankers would rather have a CPA involved with the client in the accounting process even if it meant that the CPA’s independence was impaired for taking responsibility for part of the client’s internal control system. 

Ten commenters stated that the proposed SSARSs should require a report when the accountant prepares financial statements, in whole or in part. ARSC considered the concerns raised by the commenters but continued to believe that users would be protected if the financial statements were clearly labeled to indicate that the financial statements had not been subjected to an assurance engagement. ARSC discussed that the reporting “requirement” be positioned such that the accountant would report only when:

• Engaged to report; or
• If the accountant determines that a report would decrease the likelihood that a user of financial statements that the accountant prepared, in whole or in part, may inappropriately infer, through the accountant’s association, an unintended level of reliance on the financial statements.

After significant debate and consideration of the comment letters and the public interest, ARSC voted to withdraw the June 2012 exposure drafts and commence work on a new compilation SSARS that would not have a requirement to determine whether the accountant was independent. The proposed SSARS would apply when the accountant:

• Was engaged by management to prepare financial statements;
• Intended to issue or was required by the proposed SSARS to issue a report on financial statements that the accountant did not prepare, review, or audit; or
• Agreed to be associated with financial statements (as defined for purposes of the proposed SSARS).

The proposed SSARS would not apply when the accountant was also engaged to review or audit the financial statements.

ARSC decided to retain the term “compilation” instead of referring to the engagement as a “preparation” engagement. State boards of accountancy use the term “compilation,” and ARSC was concerned that removing the term may have unintended consequences. By ARSC’s count, the Uniform Accountancy Act uses the term “compilation” 17 times, and the National Association of State Boards of Accountancy (NASBA) rules use the term 10 times. Also, the term “preparation” would create an issue, as an accountant can issue a compilation report without preparing the financial statements.

The accountant would be required to issue a compilation report when:

• The accountant decides to report on the financial statements;
• The financial statements contain known departures from the applicable financial reporting framework and such departures are not disclosed in the notes to the financial statements; or
• The entity does not include an indication on the financial statements that a CPA does not express an opinion or provide any assurance on the financial statements.
• ARSC also determined that:
• Application guidance would be provided to state that the accountant would not be precluded from disclosing independence status in the report.
• Specific guidance with respect to compilations of financial statements that omit substantially all disclosures would be developed.

Consideration of revised proposal

ARSC held a public meeting in San Diego on May 14–16, 2013. At that meeting, ARSC considered a draft of the proposed nonattest compilation SSARS and:

• Determined that the accountant should not be required to obtain management’s agreement as to the intended use of the financial statements and any restrictions on their use.
• Discussed how financial statements prepared in accordance with a special-purpose framework (an other comprehensive basis of accounting, or OCBOA) that omit substantially all disclosures required by the framework may disclose the framework. ARSC concluded that the application material should make clear that the framework may be disclosed in the financial statement titles, in the notes to the financial statements, or in the legend that states that no accountant provides any assurance on the financial statements.
• Considered the proposed effective date of the proposed nonattest compilation SSARS and determined that early application should be permitted.

ARSC subsequently held a public conference call on May 28, 2013, to vote to expose the proposed SSARS for public comment. After discussion, ARSC delayed voting to expose the proposed SSARS for public comment until further discussions could be held with certain interested parties and stakeholders.

The way forward

ARSC held a public meeting in Minneapolis on Aug. 20–23, 2013. At that meeting, ARSC continued its discussions of the proposed clarified compilation literature. ARSC concluded that the proposed SSARS should be redrafted whereby:

• 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.
• A report would always be required when the accountant performs a compilation engagement.
• Based on meetings with state board and NASBA members, ARSC debated further the requirement to determine independence in a compilation. After a lengthy and in-depth debate, ARSC reversed its position regarding independence and decided to stay with the existing requirement that the accountant determine independence and report any impairment. 
• Staff were asked to create a new proposed financial statement preparation standard that would be a nonattest service and treated as an accounting service similar to bookkeeping engagements.

ARSC concluded that the result would be two streamlined compilation and preparation standards that would be easy to understand and apply. A bright line would exist between accounting/bookkeeping and reporting services. Additionally, the accountant would not have to be concerned about whether the financial statements would be used by third parties or used internally.

Three separate proposed SSARSs would be drafted as follows:

1. A revised compilation SSARS that would provide requirements and guidance to an accountant when engaged to perform a compilation engagement of historical financial statements or other historical financial information.

2. A new SSARS that would provide requirements and guidance when an accountant was engaged to prepare financial statements for a client but had not been engaged to perform a compilation, review, or audit for those financial statements. The new preparation SSARS would not require a report—even when the financial statements were expected to be used or provided to a third party—but instead would require a legend on each page of the financial statements stating that no assurance was being provided.

3. A new SSARS that provided requirements and guidance to an accountant when an accountant agreed to permit the use of his or her name in a client report, document, or written communication that also included financial statements on which the accountant did not issue a compilation, review, or audit report.

ARSC also commenced its discussion of the comment letters received on the proposed SSARSs Review of Financial Statements and Review of Financial Statements—Special Considerations and considered proposed revisions to the draft SSARSs as a result of the comments received.

Public exposure

During a public conference call on Oct. 10, 2013, ARSC discussed and voted to expose the proposed SSARSs Preparation of Financial Statements, Compilation Engagements, and Association With Financial Statements for public comment. The proposed SSARSs were exposed for public comment on Oct. 23, 2013, with a comment end date of May 2, 2014.

Discussion continues

ARSC held a public meeting in Charleston, S.C., on Nov. 5–7, 2013. At that meeting, ARSC continued discussion of the issues raised in the comment letters received on the proposed SSARSs Review of Financial Statements and Review of Financial Statements—Special Considerations and considered proposed revisions to the draft SSARSs as a result of the comments received.

ARSC also reviewed and discussed the draft of the proposed SSARS Framework for Performing and Reporting on Compilation and Review Engagements and voted to expose the proposed SSARS for public comment. The proposed SSARS was exposed for public comment on Nov. 26, 2014 with a comment end date of May 2, 2014.

Consideration of comments

ARSC held a public meeting in Baltimore on May 20–22. At that meeting, ARSC discussed issues raised in the comment letters received on the proposed SSARSs Framework for Performing and Reporting on Compilation and Review Engagements, Preparation of Financial Statements, Compilation Engagements, and Association With Financial Statements and considered proposed revisions to the draft SSARSs as a result of the comments received.

The vast majority of the comment letters received on the proposed SSARSs were supportive. Fifty-eight comment letters were received on the proposed SSARSs Preparation of Financial Statements, Compilation Engagements, and Association With Financial Statements, and four comment letters were received on the proposed SSARS Framework for Performing and Reporting on Compilation and Review Engagements.

ARSC members acknowledged that the input from commenters was very helpful in the development of the proposed SSARSs.

The exposure draft of the proposed SSARSs Preparation of Financial Statements, Compilation Engagements, and Association With Financial Statements included specific requests for comment asking for feedback on important aspects of the proposed SSARSs. The specific requests for comment and the results were as follows:

1. ARSC asked for specific feedback about whether respondents were supportive of the revised applicability for the compilation engagement so that the proposed SSARS applies only when the accountant is engaged to perform a compilation engagement: 74% of the respondents who responded to the request were supportive, and 26% were opposed.

2. ARSC asked for specific feedback about whether respondents were supportive of the issuance of standards and guidance for an engagement to prepare financial statements: 56% of the respondents who responded to the request were supportive, and 44% were opposed.

ARSC discussed whether the applicability of each proposed SSARS was sufficiently clear. ARSC concluded that an exhibit should be included as an appendix to the proposed SSARS Preparation of Financial Statements. The appendix would be titled “Preparation of Financial Statements Versus Assistance in Preparing Financial Statements” and would provide examples of services that the accountant may be engaged to perform and whether the SSARS would apply.

ARSC concluded that the independence requirements with respect to engagements to prepare financial statements as well as compilation engagements are sufficiently clear.
 
3. ARSC asked for specific feedback about whether respondents are supportive of the requirement that the engagement letter or other suitable form of written agreement be signed by (1) the accountant or the accountant’s firm and (2) management: 80% of the respondents who responded to the request were supportive, and 20% were opposed.

4. ARSC asked for specific feedback about whether respondents were supportive of the proposed requirement that each page of the financial statements that the accountant has prepared include a statement or legend stating that no CPA provides any assurance on the financial statements or else the accountant would be required to issue a disclaimer: 72% of the respondents who responded to the request were supportive, and 28% were opposed.

ARSC affirmed that it continued to support the nonreporting aspect of the proposed SSARS Preparation of Financial Statements when the accountant was engaged to prepare financial statements but not to perform a compilation, review, or audit of those financial statements. ARSC further affirmed that it continued to believe that a legend or statement should be required on each page of the financial statements prepared by the accountant so that a user does not infer an inappropriate level of assurance.

ARSC directed that a requirement be added to state that when, after discussions with management, the accountant prepares financial statements that contain a known departure or departures from the applicable financial reporting framework (including inadequate disclosure), the accountant should disclose the material misstatement or misstatements in the financial statements.
 
5. ARSC asked for specific feedback about whether respondents were supportive of the proposed compilation reporting requirements: 89% of the respondents who responded to the request were supportive, and 11% were opposed.

Certain respondents expressed concern with an application paragraph in the proposed SSARS Compilation Engagements that stated that an accountant may issue a compilation report on financial statements that the accountant prepared even if not so engaged. In response to these concerns, ARSC directed that the application paragraph be deleted from the proposed SSARS and that the paragraph in the proposed SSARS Preparation of Financial Statements that includes the requirement to include the legend/statement be revised to state that, if the accountant is unable to include a statement on each page of the financial statements, the accountant should issue either:

• A disclaimer that makes clear that no assurance is provided on the financial statements; or
• A compilation report in accordance with AR-C Section 80, Compilation Engagements.

If the accountant determines to issue a compilation report, the accountant would be required to adhere to all of the requirements in AR-C Section 80, including the requirement to obtain an engagement letter for a compilation engagement.

6. ARSC asked for specific feedback about whether respondents were supportive of the proposed SSARS that would provide requirements and guidance when an accountant permits the use of the accountant’s name in a report, document, or written communication containing financial statements on which the accountant did not issue a compilation, review, or audit report: 64% of the respondents who responded to the request were supportive, and 36% were opposed.

Certain commenters expressed confusion and thought that the proposed SSARS Association With Financial Statements would result in a separate service or asked how the proposed SSARS differed from the proposed SSARS Preparation of Financial Statements. ARSC felt that the proposed SSARS Preparation of Financial Statements adequately addressed the risk of accountant association with financial statements that the accountant has prepared but has not issued a report on. Situations where the accountant’s name appears in a document along with financial statements that the accountant did not prepare or issue a report on would be subject to the accountant’s own risk management, and no additional requirements are necessary. The ARSC directed that the separate SSARS Association With Financial Statements not be issued.

7. ARSC asked for specific feedback about whether respondents were supportive of the proposed effective dates, specifically the permitting of early implementation: 75% of the respondents who responded to the request were supportive, and 25% were opposed.

After discussion, the ARSC affirmed that it supports the proposed effective dates, including permitting early implementation.

With respect to the proposed SSARS Framework for Performing and Reporting on Compilation and Review Engagements, ARSC concluded that the proposed SSARS should include requirements and application material with respect to engagement-level quality control.

ARSC also discussed revisions made to the proposed clarified and revised SSARS Review of Financial Statements based on the discussion at the November 2013 ARSC meeting.

Vote for issuance

ARSC held a public meeting in Providence, R.I., on Aug. 19–21. At that meeting, ARSC voted to issue one final SSARS that included the following 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; and
• Section 90, Review of Financial Statements.

The standard was issued Oct. 23.

—Michael P. Glynn (mglynn@aicpa.org) is a senior technical manager with the AICPA Audit and Attest Standards team. He is the staff liaison to the AICPA Accounting and Review Services Committee.