Explaining the role of ARSC and its decision tree

Mike Westervelt, CPA, is chair of the AICPA Accounting and Review Services Committee (ARSC), and he joins this episode of the JofA podcast to discuss the committee’s role in assisting members.

In 2023, ARSC released a decision tree to guide practitioners in eliminating confusion related to the applicability of AR-C Section 70, Preparation of Financial Statements. He compares the decision tree, an interactive PDF, to the Choose Your Own Adventure book series.

Resources:

• ARSC homepage
• Analytical Procedures in a Review Engagement
• Guide to financial statement services

What you’ll learn from this episode:

• An introduction to ARSC and its main roles.
• An explanation of preparation services and related guidance.
• What Westervelt means by saying: “You cannot trip into a standard anymore.”
• A guide to ARSC’s decision tree and how it can eliminate confusion for practitioners about the applicability of AR-C Section 70.
• Other resources for members and areas of focus for ARSC in the future.

Play the episode below or read the edited transcript:

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript

Neil Amato: Welcome to the Journal of Accountancy podcast. This is your host, Neil Amato. Joining me for this episode is Mike Westervelt, a CPA who is chair of the Accounting and Review Services Committee, that’s ARSC, or “Arsc,” I guess for those wanting to go the one-syllable route. That committee generally goes that one-syllable route.

Mike and I are talking about some of the recent happenings related to ARSC, including some key resources. Mike, welcome to the podcast. To start, for listeners who might not be aware, what in a nutshell is ARSC and how does it serve AICPA members?

Mike Westervelt: Hey, thanks, Neil. I appreciate it. ARSC is essentially a seven-person committee. What that committee does is we develop accounting standards for compilations, preparation, and reviews. We also develop guidance and guides and resources to help folks work through those types of engagements.

Amato: What in a few words are preparation services and what is some of the guidance that has come out recently related to those services?

Westervelt: Preparation services, they fall under AR-C Section 70. They came about with the implementation of SSARS 21 [Statement on Standards for Accounting and Review Services: Clarification and Recodification]. Essentially, we developed a standard to allow for a CPA to prepare financial statements without having a reporting requirement. In the past, we would only be able to do compilations or reviews under SSARS standards. Once AR-C Section 70 [Preparation of Financial Statements] came about, we could issue a financial statement without a report, but it does have some other requirements. It has a no-assurance statement, has a requirement to identify departures from whatever financial reporting framework you’re reporting under. That was developed to serve the public interest and remove a reporting requirement when it’s not necessary.

Amato: And so, AR-C Section 70, it can sometimes apply, it can sometimes not. When does it apply?

Westervelt: Great question. When we’re thinking about application of preparation standards, there’s a little bit of confusion. Simply stated, it applies when you’re engaged and probably better said, when you’re hired, to prepare financial statements. In the past, before SSARS 21, you could trip into a compilation. With the issuance of SSARS 21, it got very clear that you cannot trip into a standard anymore. It’s similar to, I can’t trip into an audit, I can’t trip into a review — those are both engagement-driven.

In addition to that, I cannot trip into a compilation or preparation. One of the confusions that are out there, and the reason why we’re developing resources to address some of that confusion, is folks might confuse “engaged to perform” with “engagement letter.” Hence, if I don’t get an engagement letter, I don’t fall into compilation or preparation services. The reality is it’s based upon what the client has asked you to do. That’s what the purpose of the decision-tree resource is, why we created to help people navigate that.

Amato: You just said that phrase, “decision tree.” Explain how that gets used and how it can help eliminate the confusion in practice.

Westervelt: Sure. If you think back when I was younger where they used to have these books, I’m sure they still have them. It’s Choose Your Own Adventure. The decision tree is really designed to help individuals with a bunch of questions. It’s an interactive tool. You can follow the flowchart at the end of it if you want. Because some people look at things differently. There is an actual flowchart it takes you through. If there’s this scenario, then I would consider additional items, or you can just do it as an interactive tool. It asks you a question.

To give you an example, one of the first questions it asks you is, “Are you in public practice, are you not in public practice?” If I’m not in public practice, preparation services would not apply, so I’m done. I don’t need to go any further. If I’m in public practice, I continue along the decision tree, and it asks me more questions. The second question I would ask you is, “Are you compiling, reviewing, or auditing the financials?” If the answer is “yes,” you fall under those standards. If the answer is “no,” you have some additional considerations. The whole idea of this is to really get folks to be able to walk through scenarios and remove the if/then considerations of “am I in preparation services or not?”

Amato: Anything else to add on that particular topic or guidance?

Westervelt: Yeah, there definitely is. This is me, how I look at preparation services. It’s engagement-driven or what you’re hired to do for your client as to whether you’re in prep or not. Some of it comes down to some professional judgment as to whether you want to be in the standard or not. Because you can be in the standard and get engaged to be in the standard if you think it’s advantageous to do so.

I always go through some scenarios of consideration, and it’s addressed in the decision tree, but you also have to think outside a little bit. The first thing I always determine is, I ask the client, “Do you need me to prepare financials?” If the answer is “yes,” well, you’re in prep services. If the answer is “no,” I use some thought process to say, “Does the client have the intention to take responsibility for the financial statements?”

One way you can understand that is, if something goes wrong with the financial statements, how will the client interpret that? Would they interpret it as they made an error and that’s why the financials might be wrong? Or would they think that their CPA might have made an error, and they look to them and say, “Hey, I hired you to make sure my numbers are right,” so that might give you an indicator that maybe I’m in prep. Another thing to consider is my client’s abilities. If my client does not have the ability to prepare financials or if my client doesn’t have the ability to understand how I assist him in preparing financial statements, I might consider that I should probably have been in prep.

Now, none of those are black lines. We can’t really have a black-line judgment as far as something that is risk-based. But you get back to the ultimate consideration is, has the client asked me to prepare financials? Is that what they’re paying me to do? If that’s the case, I’m in the standard, and I think this decision tree does a good job of getting you there. But use some practical thoughts as to do I want to be in preparation standards? Even if you’re not in the prep standards, I would want to get an engagement letter, agreement, statement of work, some contract with my client that tells me what I’m doing and what I’m not doing. What I’ll typically do, if I’m not preparing financials for my client, I will get an agreement that says I’m assisting you with these services. A byproduct of what I do will not be a set of financial statements.

Sometimes that’ll prompt the client to say, “Wait, I want you to do that.” Then I would know I should be in prep, but I think that makes it clear to the client what I’m doing and what I’m not doing. The reason why I say I believe you should get that agreement: There’s nothing in the consulting standards that says you have to have an agreement. But best practice there, you should probably get an agreement that dictates what you’re going to do for your client and what you’re not going to do for your client.

Amato: That’s great. Thank you. On another resource topic, can you explain the AICPA practice aid with the title Analytical Procedures in a Review Engagement?

Westervelt: Sure. I really like this practice aid because when you think about a review, it’s limited assurance that the financial statements are materially accurate. We’ve done some level of work on the financial statements for our client to give them some level of assurance that the financials are accurate. It’s less than that of an audit, which is reasonable assurance. It’s more than that of a comp or prep, which is no assurance. The way we typically do that is we do inquiry in analytics. In addition to that, we can perform additional procedures to get us to where we feel comfortable with limited assurance that the financials are materially accurate. What this practice aid does, it identifies analytics that are best used to get you to limited assurance.

If you think through that, if I design analytics that are precise and effective to respond to the work that I’m doing, I’m going to get better review evidence, and I’m going to better be able to determine whether the financials are materially accurate without having to pull in additional procedures. There’s plenty of examples to identify the best analytics to use. There’s plenty of guidance around proper documentation of review evidence based upon these analytics and which analytics are better than others.

For example, one analytic could be, I’m going to compare this year to last year and identify any differences above 5% in this dollar threshold. That is not a very good analytic because I didn’t really develop expectations as far as what should happen. I’d be better off having a longer trend analysis of multiple years. If I can identify certain analytics that are tied to nonfinancial data, those will help me get more precise analytics. That’s what this tool is designed to do. It’s designed to get you the best analytics to support your review and your review evidence. Then it has examples and guidance as to how you can get there based upon certain industries and certain metrics that might help you get to that conclusion.

Amato: That practice aid, Analytical Procedures in a Review Engagement again is the title. We’ll include a link to that in the show notes for this episode. There are other resources available as well. Mike, do you want to talk about any of the others to highlight right now?

Westervelt: Sure. We have our preparation, compilation, and review engagement guide. Essentially what that does is periodically we update that guide to identify changes in standards. If we’re seeing there’s problem practice areas, we want to give guidance and support to help professionals implement those standards.

You can read the standard and come to your own determination and follow. The guide gives you a little more narrative and helpful hints and guidance. It covers things like what’s required in a SSARS engagement, whether it be a prep, comp, or review, what performance requirements are required in each, and then what reporting requirements are needed when you’re issuing these financial statements. Then it gets into some nuances in some areas where they might not be the normal situation.

If you’re doing standard U.S. GAAP financial statements and you’re reviewing, it might be very different than if I’m doing tax basis or other comprehensive basis of accounting. It gives additional guidance and examples to get you there, and some of those provide you, here’s how you consider those areas. And in addition to that, you have illustrative examples, practice aids, and then other resources to help you have the most high-quality work that you can for those types of engagements.

Amato: Finally, Mike, we really appreciate your time today. What should listeners be on the lookout for as this new year, 2024, progresses and any other closing thoughts on this topic?

Westervelt: Great question. As we are getting into 2024, we would ask you to consider if you have any additional problem, practice areas that you need assistance with. We would like to make sure we consider those needs. One area that ARSC is looking into is honing in on the concept of risk determination and limited assurance in a review engagement. I think there’s an area where we can hone in and fine-tune the definition of limited assurance so we have a more consistent approach. If there are other practice areas you need assistance with or areas where you have confusion, by all means, let us know. We are always looking into those.

At this point, we feel that the standards under SSARS are pretty good. We updated them for quality management, which wasn’t a really big lift for an update. You’ll see SSARS 26 [Quality Management for an Engagement Conducted in Accordance With Statements on Standards for Accounting and Review Services] come out or actually has come out, but it really was just some conforming changes and some wording, nuances that we want to be consistent with other standard-setters and the quality management standard.

By all means, look into that standard. It’s not covered by SSARS, but it is a big change in practice. We would like to fine-tune but not rehaul our standards going forward, with the perception of we understand we don’t want to add more burden on professionals. But we are always looking for ways to enhance guidance and clarification if folks are struggling with standards.

Amato: Thank you for that, and thank you for dressing the part for our listeners. I didn’t tell Mike that it was audio only, and he — I mean, coat and tie, firm logo in the background — looks awesome. Mike, thank you very much.

Westervelt: Awesome. Thanks, Neil.